SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K
(Mark One)
 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934
     For the fiscal year ended December 31, 1996
                                       OR
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     For the transition period from       to

                         Commission File Number 0-11749
                         ------------------------------

                                   SCIOS INC.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                              95-3701481
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

           2450 Bayshore Parkway, Mountain View, California 94043-1173
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (415) 966-1550

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $0.001 par value
                    Class D Warrants to purchase Common Stock
                            Contingent Payment Rights
                          Common Share Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES X NO

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The approximate  aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 17, 1997 was $285,378,440.

As of March 17, 1997,  35,833,923  shares of the registrant's  Common Stock were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                        Form 10-K Part
Definitive Proxy Statement with respect to                            III
the 1997 Annual Meeting of Stockholders



<PAGE>



                                     PART I


Item 1.  BUSINESS

Overview

    Scios Inc. ("Scios" or the "Company") is a biopharmaceutical company engaged
in the discovery, development,  manufacture and commercialization of novel human
therapeutics   based   upon  its   capabilities   in  both   protein-based   and
small-molecule   drug  discovery  and  development.   The  Company  focuses  its
proprietary  research  and  development  efforts  on  products  to  treat  acute
illnesses,  primarily in the areas of  cardiovascular  and renal disorders,  and
seeks to collaborate  with corporate  partners in the development of products to
treat chronic diseases.  The Company also has a marketing and sales organization
selling  third-party   products  that  generate  cash  to  help  fund  continued
development  of  the  Company's  proprietary  products.  To  date,  none  of the
Company's  proprietary  products  have been  developed to the  commercialization
stage.

    The Company's lead products are AURICULIN(R)  anaritide for the treatment of
oliguric acute renal failure,  which is being  developed with  Genentech,  Inc.,
NATRECOR(R)  BNP for the  treatment  of  acute  congestive  heart  failure,  and
FIBLAST(R)  trafermin,  which is being  developed  with  partners as a potential
treatment for stroke and various vascular and wound healing indications. Each of
these  products is  discussed  in more detail  below in "Business -- Products in
Development."

    The Company  expects to announce key results in 1997 from Phase III clinical
trials in the United  States on the use of AURICULIN  in the  treatment of acute
renal  failure  ("ARF")  and on the use of NATRECOR  in the  treatment  of acute
congestive  heart  failure  ("CHF").  The outcome of the  AURICULIN and NATRECOR
clinical  trials could have a substantial  effect on the Company's stock price -
either  positive or negative - depending  on the nature of the  results.  In May
1995, the Company  announced the results of its  500-patient  Phase III clinical
trial of  AURICULIN  for the  treatment  of ARF.  While the results in the broad
population  of ARF patients  were a  disappointment,  there was a  statistically
significant clinical benefit in the  prospectively-defined  subgroup of oliguric
(abnormally low urine output) ARF patients. In October 1995, the Company began a
second,  pivotal  Phase III trial of AURICULIN in patients  with  oliguric  ARF.
Scios cautions investors that the presence of statistically  significant results
in one clinical trial does not ensure that these results will be repeated in any
subsequent  trial.  Scios expects to complete its current AURICULIN trial in the
second half of 1997 and  applications  will be filed for  approval to market the
product in the United States and elsewhere, if the results support such filings.
Scios is  evaluating  NATRECOR  for the  treatment of acute CHF in two Phase III
clinical  studies.  The Company expects to complete a pivotal NATRECOR Phase III
efficacy trial in 1997 and announce the results of such study.  At this time, it
is not clear  whether the second Phase III trial for NATRECOR  will be completed
in 1997 or 1998.

    Scios'  collaborators  on  FIBLAST  are  Kaken   Pharmaceuticals  Co.,  Ltd.
("Kaken") of Japan, and the Wyeth-Ayerst  Laboratories division of American Home
Products  Corporation  ("Wyeth-Ayerst").  In June 1996,  Kaken  filed a New Drug
Application  (an  "NDA")  seeking  approval  to  market  FIBLAST  in  Japan as a
treatment for recalcitrant  wounds. In October 1996,  Wyeth-Ayerst began working
with  Scios on the use of  FIBLAST  in the  treatment  of  stroke  and  vascular
disorders.

    Scios has capabilities in molecular and cell biology,  protein and medicinal
chemistry, molecular modeling, pharmacology, and the bioprocessing sciences, and
has the tools to  undertake  the  rational  design of small  molecules  based on
knowledge of molecular targets. The Company also has a flex-time sales force and
a line of psychiatric products that the sales force markets.  This includes four
psychiatric  products  that are sold  under a license  from  SmithKline  Beecham
Corporation:     ESKALITH(R),    ESKALITH    CR(R)    (lithium),    THORAZINE(R)
(chlorpromazine),      STELAZINE(R)     (trifluoperazine)     and     PARNATE(R)
(tranylcypromine).  In addition,  the sales force  markets  HALDOL(R)  Decanoate
(haloperidol),   which  is  co-promoted  with  Ortho-McNeil  Pharmaceutical,  an
affiliate  of Johnson & Johnson,  and  EFFEXOR(R)  (venlafaxine  HCl),  which is
co-promoted with Wyeth-Ayerst. See "Business -- Marketing and Sales".


<PAGE>

    Prior to approval of its first product,  Scios' financial  strategy involves
careful  management  of  cash  while  investing  in its  product  pipeline,  and
generating cash flow from its commercial  operations and corporate  partnerships
supporting specific products under development. Certain of the Company's product
candidates have been licensed to corporate partners for development or are being
developed by Scios with funding from corporate partners.  Under its arrangements
with corporate  partners,  Scios  typically  receives  research and  development
funding,  payments for clinical supplies and/or milestone payments for achieving
scientific and clinical benchmarks.  Generally,  the Company is also entitled to
royalties  on  commercial  sales of  products  by its  partner  or will share in
profits in countries where Scios is  co-marketing  the product with its partner.
In some cases,  Scios may receive  additional  revenues from the  manufacture of
products.

    Scios is seeking  to reach  profitability  in 1998  through  development  of
certain products,  collaborations  with corporate partners on other products and
the  expansion of its  marketing  and sales  capability.  This  statement of the
Company's  goal  and  other  statements  in this  Annual  Report  on  Form  10-K
concerning such matters as product development,  and the timing thereof,  future
revenues,   operations  and   expenditures,   regulatory   approval  and  market
introduction  of  the  Company's  products  and  estimates  of the  capacity  of
manufacturing and other facilities to support such products are  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995  ("PSLRA-95").  Each  statement  is based on  current  expectations  of the
Company  and is  subject  to risk  and  uncertainty.  All  such  forward-looking
statements  are  necessarily  only  estimates  of future  results and the actual
results achieved by the Company may differ materially from these projections due
to a number of factors,  including: (1) the Company's ability to demonstrate the
safety and  efficacy of its products at each stage of clinical  development  and
obtain  timely  regulatory  approval  and  patent and other  proprietary  rights
protection  of its  products;  (2)  decisions  made by the  U.S.  Food  and Drug
Administration  and  other  agencies  regarding  the  indications  for which the
Company's  products  may be approved and the timing of such  decisions;  (3) the
actions of third  parties,  including  collaborators,  licensees,  manufacturing
partners, and competitors of the Company; (4) market acceptance of the Company's
products;  (5) the Company's ability to produce product candidates in commercial
quantities at reasonable cost and in a manner  acceptable to various  regulatory
authorities;  and (6) the accuracy of the Company's  information  concerning the
products  and  resources  of  competitors  and  potential  competitors.  Factors
creating uncertainty are discussed in more detail in individual sections of this
Annual  Report on Form 10-K.  In particular  see  "Business-Product  Development
Activities   and  Risks"  below  and  the   "Outlook  and  Risks"   sections  of
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

The Company was  incorporated  in California  in 1981 under the name  California
Biotechnology  Inc. and  reincorporated in Delaware in 1988. The Company changed
its name to Scios Inc. in February  1992,  to Scios Nova Inc. in September  1992
following acquisition of Nova  Pharmaceuticals,  Inc., and returned to using the
name Scios Inc. in March 1996.  The principal  executive  offices of the Company
are located at 2450 Bayshore  Parkway,  Mountain  View,  California  94043.  The
telephone number at that location is (415) 966-1550.



<PAGE>


Product Development Activity Table

    The  following  table  summarizes  certain  information   concerning  Scios'
principal products under development.  The information in the table is qualified
in its entirety by reference to the more  detailed  information  concerning  the
Company's products that is set forth elsewhere in this report:
<TABLE>
<CAPTION>

                               POTENTIAL APPLICATIONS/                                 DEVELOPER/CORPORATE
PRODUCT                        INDICATIONS                       STATUS*               PARTNER (TERRITORY)
<S>                            <C>                               <C>                   <C>   


AURICULIN(R)anaritide         Oliguric acute renal failure       Phase III clinical    Scios/Genentech, Inc.


NATRECOR(R)BNP                Acute congestive                   Phase III clinical    Scios
                               heart failure

FIBLAST(R)trafermin           Recalcitrant wounds (Japan)        NDA filed             Kaken  (Asia)
                               Stroke                            Phase II clinical     Scios/Wyeth-Ayerst (ex-Asia)
                               Coronary revascularization        Phase II clinical     Scios/Wyeth-Ayerst (ex-Asia)
                               Peripheral revascularization      Phase II clinical     Scios/Wyeth-Ayerst (ex-Asia)


Insulinotropin                Type II diabetes                   Phase II clinical     Novo Nordisk A/S (worldwide)


Vascular endothelial          Cardiovascular disorders           Preclinical           Scios
growth factor


Amyloid protease              Alzheimer's disease                Research              Scios
inhibitors


Serine protease inhibitors    Cardiovascular disorders           Research              Scios


<FN>

* "Research"  denotes work up to and  including  discovery  research and initial
bench scale production. "Preclinical" denotes studies in animal models necessary
to  support  an  application  to the Food and Drug  Administration  ("FDA")  and
foreign health registration  authorities to commence clinical testing in humans.
Clinical trials for  pharmaceutical  products are conducted in three phases.  In
Phase I, studies are  conducted to determine  safety.  In Phase II,  studies are
conducted to gain additional safety information, as well as preliminary evidence
as to the efficacy and appropriate  doses of the product.  In Phase III, studies
are conducted to provide sufficient data for the statistical proof of safety and
efficacy,  including  dosing  regimen.  Phase  III is the  final  stage  of such
clinical studies prior to the submission of an application for approval of a new
drug or licensure of a biological product.  "NDA filed" means an application for
commercial  sale of a new drug has been filed in the indicated  country  seeking
approval to market the product in that country for the covered indication.
</FN>
</TABLE>

                                       3
<PAGE>


Product Development Activities and Risks

    Scios focuses its product  development  efforts on proprietary  therapeutics
for acute illnesses,  principally in the areas of acute cardiovascular and renal
disorders.  The  Company's  success  will  depend  on  its  ability  to  achieve
scientific  and  technological  advances and to  translate  such  advances  into
reliable,  commercially  competitive products on a timely basis. As described in
"Business -- Products In Development,"  Scios' products are at various stages of
research and development,  and further  development and testing will be required
to determine their technical feasibility and commercial  viability.  The Company
cautions  investors  that its  business  is  subject  to  significant  risks and
uncertainties.  In  particular,  the  proposed  development  schedules  for  the
Company's  products  may be  affected by a wide  variety of  factors,  including
technological  difficulties,  proprietary  technology  and rights  developed  by
others,  reliance  on third  parties to perform  certain  activities  or provide
certain resources, and changes in governmental regulation. Many of these factors
will not be within the control of Scios. As a result,  there can be no assurance
that any of the  products  described  in this Item 1 or  resulting  from  Scios'
research  programs  will  be  successfully  developed,  prove  to  be  safe  and
effective, meet applicable regulatory standards, be capable of being produced in
commercial quantities at reasonable costs, or be successfully marketed.

    In developing pharmaceutical products, the Company faces critical challenges
in at least three broad areas:  the discovery of novel  compounds that are worth
developing;  the successful  clinical  testing in humans of candidate  compounds
that the Company deems worthy of development;  and competition in many forms and
areas. The discovery process in pharmaceutical  development often involves doing
or understanding what has not previously been done or understood,  while working
in  biological   systems  that  are  not  always   predictable   or  predictive.
Pharmaceutical drug discovery is an inherently challenging and risky undertaking
in which numerous factors come into play in determining success or failure. Some
of the key  factors  include the  ability to  identify  appropriate  targets and
models to use in understanding  complex disease  processes,  to  comprehensively
screen many compounds under  consistent  conditions to identify those which show
promise, to build on insights gained from numerous and frequently imperfect data
points in selecting the compounds most likely to treat the target disease,  even
though the target disease itself is not completely  understood  (both as to what
causes that disease and how the disease  manifests  itself),  and to avoid being
misled  by  false  indicators.  These  efforts  all take  place in  increasingly
competitive environments in which many companies are often simultaneously trying
to apply their  resources and insights to the same targets and  challenges.  How
well a particular  company  marshals its resources to attack an issue will often
determine  its success.  Because it is  impractical,  if not  impossible,  to do
everything  imaginable  to acquire  sufficient  knowledge  to assure  success in
meeting these challenges, intuition, untested assumptions and luck can sometimes
play a  significant  role in  determining  a  particular  company's  success  in
pharmaceutical discovery and development.

    The Company particularly cautions investors that any decision to commence or
continue  clinical trials in humans based on the results of preclinical  work in
cell-based  assays  and  animal  models or an  earlier  clinical  study does not
necessarily  mean that the results achieved in subsequent human clinical studies
will be similar to those achieved in the earlier studies. A central issue in all
pharmaceutical  development  is  how  well  a  particular  cell-based  assay  or
preclinical animal model selected by the investigator predicts the effectiveness
of  a  drug  candidate  in  treating  the  target  disorder  in  humans.   While
well-developed and well-tested models exist for some disorders,  often it is not
possible to know with certainty the predictive  quality of a model until results
in humans are obtained. In some cases, it turns out that the selected model does
not  accurately  predict the effect of a drug candidate in humans or whether the
product is safe to use in humans at all.

    In clinical testing of compounds selected for development, the Company faces
challenges in several  areas.  In the clinical  trial  initiation  phase,  these
factors  include  creating a sound  study  design that will as  effectively  and
efficiently as possible reveal the safety and efficacy of a particular  compound
and then finding appropriate clinical investigators who can identify and recruit
patients and follow the clinical  protocol.  Each clinical trial itself contains
the risk that a  compound  will not  produce  positive  clinical  results in the
specific  subjects  included in that study  population  or that it will  produce
ambiguous or mixed  results in which the benefits of the compound do not clearly
enough  outweigh  any adverse side  effects,  or that  judgments  will have been
incorrect about how large the study  population  needed to be to demonstrate the
effects  of the  compound.  Clinical  uncertainty  exists  even where a previous
clinical  study has  produced a favorable  result.  When  clinical  trials for a
compound are  completed,  a vast quantity of data on a wide range of topics must
be  assembled  in a manner  that will give  regulatory  authorities  the  basis,
following  intense  review  by  the  FDA  and  comparable  regulators  in  other
countries,  to decide  whether  or not to approve  the  product  for  marketing.
Inherent  in the  regulatory  review  process  is the risk  that the  particular
regulatory  agency will not find  sufficiently  reliable  the  methods  that the
company  selected  or that such agency  will place  different  weight on various
factors and results than the developing  company did. In addition,  when another
company's product is already on the market to treat the target  indication,  the


                                       4
<PAGE>

company  developing  a  new  drug  for  the  same  indication  faces  additional
challenges,  which may include  demonstrating  that the new product has superior
properties.  Because the regulators in various countries operate under different
regulatory  systems and approaches,  the decisions and requirements with respect
to the  clinical  testing of a compound  may vary from one  country to  another.
These issues and a company's  inability to address them  adequately may lead the
regulatory  authority to put limits on how or for what indication a compound may
be marketed,  which directly affects a product's commercial success.  Failure to
deal with these factors to the satisfaction of the regulatory authority can also
lead to the denial or delay of approval to market a product.

    The Company plans to continue the development of selected products primarily
under the sponsorship of corporate partners. Continued funding and participation
by the  Company's  corporate  partners  under  joint  development  or  licensing
agreements  will  depend  not only on the timely  achievement  of  research  and
development objectives by the Company, which cannot be assured, but also on each
corporate  partner's  own  financial,   competitive,   marketing  and  strategic
considerations and overall attitude towards engaging in outside  collaborations.
Under several of its joint  development or license  agreements,  Scios relies on
its corporate  partners to conduct  preclinical and clinical  trials,  to obtain
regulatory  approvals,  and to  manufacture  and market  products.  Although the
Company believes that its corporate  partners will have an economic incentive to
meet their  contractual  responsibilities,  the  amount and timing of  resources
devoted  to these  activities  generally  will be  controlled  by the  corporate
partner.  The  recent  wave of  mergers  among  the  established  pharmaceutical
companies and the downsizing  and shift in research  strategy that often follows
these mergers have underscored the fact that corporate partners can change their
strategy,  and may  sometimes  drop  entirely the  collaborations  they or their
predecessor  have had  with  other  companies.  See  "Business  --  Products  in
Development -- Other Research" for an example involving Scios.

    All of these factors combine to make drug development  extremely challenging
and competitive.  At the same time, these factors  contribute to the significant
rewards and satisfaction  that can accrue to the personnel and stockholders of a
company  that  successfully  overcomes  the  challenges  of drug  discovery  and
development and creates a new pharmaceutical agent.

Products in Development

    AURICULIN(R) anaritide. AURICULIN is a synthetic version of a human hormone,
atrial  natriuretic  peptide  ("ANP"),  which is produced in the heart and has a
range of  biological  activities  known to be  important  in  kidney  and  heart
function,  including increasing the elimination of water and salt from the body.
ANP improves kidney function by increasing  blood flow into the filtration units
of the kidney and restricting blood outflow.

    In May 1995,  the Company  announced  the  results of its initial  Phase III
clinical  study of AURICULIN for the treatment of acute renal  (kidney)  failure
("ARF").  AURICULIN  did not reduce the need for  dialysis in the broad  patient
population,  nor did the drug reduce mortality;  however, this initial phase III
study did demonstrate that AURICULIN significantly reduced the need for dialysis
in a  prospectively-defined  subgroup of patients  suffering  from  oliguric ARF
(patients   with   abnormally  low  urine   output).   The   placebo-controlled,
double-blinded  study involved 504 patients at more than 60 centers. The primary
clinical endpoint in the initial Phase III study was a reduction in the need for
kidney  dialysis  in ARF  patients.  The study  was also  designed  to  evaluate
AURICULIN's   potential  for  decreasing   mortality  and  to  increase   21-day
dialysis-free  survival in such  patients.  The  oliguric  subgroup  represented
approximately  24% of the  504-patient  study. In the 120 oliguric ARF patients,
dialysis was required in 64% of the patients receiving AURICULIN compared to 87%
of the patients  receiving placebo,  a 26% reduction  (p=0.005).  Treatment with
AURICULIN  also  significantly  increased  the number of oliguric  patients  who
survived for 21 days without requiring dialysis (dialysis-free survival) from 8%
in the  placebo-treated  patients  to 27% in  patients  treated  with  AURICULIN
(p=0.008).  Treatment with AURICULIN did not  significantly  reduce mortality in
oliguric  patients.  Based on these results,  discussions with the Food and Drug
Administration and Genentech,  and quantitative  market research indicating that
oliguric ARF affects up to 80,000 patients in the United States each year, Scios
initiated a second phase III clinical  study of AURICULIN  for the  treatment of
oliguric ARF in October 1995. The study will enroll  approximately  250 patients
and is being  conducted  at 60 to 80 centers  throughout  the United  States and
Canada.  The  primary  clinical  endpoint  of the study is 21-day  dialysis-free
survival.  The study is designed to demonstrate  whether  patients with oliguric
ARF treated with  AURICULIN  have a higher rate of  dialysis-free  survival than
patients receiving a placebo.  The study is also designed to evaluate the number
of  oliguric  ARF  patients  requiring  acute  dialysis  at 14 days and  patient
mortality at 21 days following treatment. As with all clinical studies, Scios is
not able to predict  whether the results of the second phase III study currently
being  conducted  will be similar to those achieved in the first phase III study
or if such results  will be  sufficient  to achieve  marketing  approval.  Scios
expects to  complete  the second  Phase III study in the second half of 1997 and
announce the results. If the results support such filings,  applications will be
filed for approval to market AURICULIN in the United States and elsewhere.

                                       5
<PAGE>

    On December 30, 1994,  the Company  entered into a  Collaboration  Agreement
(the "Collaboration  Agreement") with Genentech,  Inc. ("Genentech") relating to
the  joint  development  and  commercialization  of  AURICULIN  for  use  in the
treatment  of  ARF.  The  Collaboration  Agreement  provides  for  the  parties'
co-promotion  of AURICULIN in the United  States and Canada and gives  Genentech
exclusive  marketing rights in countries other than the United States and Canada
(the "Licensed Territory").  Generally, Scios will receive a share of profits in
North   America  and  royalties  on  sales  in  the  Licensed   Territory.   The
Collaboration  Agreement  was  amended in 1996 (the  "Genentech  Amendment")  by
mutual agreement to reflect the revised development  timetable and the timing of
milestone  payments.  As revised,  Scios will  receive a $15  million  milestone
payment upon the filing of a New Drug  Application  ("NDA") for AURICULIN in the
United States prior to June 30, 1998 and $15 million upon the earlier of January
1, 2001 or net sales exceeding $100 million over a 12-month  period.  If the NDA
filing in the United States  occurs after June 30, 1998,  Genentech may elect to
pay Scios on the  preceding  schedule  or to pay Scios $30 million on receipt of
United States regulatory  approval.  Additional  milestone payments of up to $20
million are due Scios upon obtaining  regulatory approvals and achieving certain
sales levels in other designated markets.

    The Company is bearing the development  costs of AURICULIN until the receipt
of regulatory  approval in North America.  Thereafter,  all costs of development
and  promotion  within  North  America  will be shared  equally  between the two
parties.  Genentech or its  sublicensee  will bear all costs for development and
promotion within the Licensed  Territory.  Subsequent to the license  agreement,
Genentech,  as part of certain agreements it made with F. Hoffman-La Roche Ltd.,
elected to end marketing  activities  outside of North  America and,  therefore,
Genentech is seeking a  sublicensee  to assume its rights and  obligations  with
respect to AURICULIN within the Licensed Territory.  Scios is being consulted in
such effort but  Genentech has the right to select its  sublicensee.  The effort
put forth by the  selected  sublicensee  will  affect the results  achieved  for
AURICULIN in the Licensed Territory.

    Under the original  Collaboration  Agreement,  if the Company did not file a
NDA for  AURICULIN by December 31, 1997,  or if,  within 60 days of such filing,
the FDA has not accepted for review an NDA which was filed by December 31, 1997,
Genentech had certain options described below. The Genentech  Amendment extended
from December 31, 1997 to December 31, 1998 the date by which Scios must file an
NDA in the United  States in order to avoid  Genentech  having the option of (i)
electing  to  bring  NATRECOR  or  another  natriuretic  peptide  product  under
development by Scios into the  Collaboration  Agreement for use in the treatment
of ARF or (ii) terminating the Collaboration Agreement.  This option could limit
the Company's  ability to enter into  collaborative  arrangements on NATRECOR or
any other natriuretic peptide product until the expiration of such deadlines. If
Genentech were to elect to bring a product into the  Collaboration  Agreement in
place of  AURICULIN,  the  milestone  payments  due with respect to such product
would be reduced significantly.

    Looking  forward,  there  can be no  assurance  that the  Company  will ever
receive the requisite  regulatory  approvals to market  AURICULIN or receive the
milestone  payments  called for by the  Collaboration  Agreement.  In part,  the
latter will depend on Genentech's  assessment of the product's  performance  and
potential,  which could differ from Scios' assessment. In addition, there can be
no  assurance  that  AURICULIN  (or  any  other  product   developed  under  the
Collaboration  Agreement) will generate  sufficient,  if any,  revenue  (through
milestone payments, sales, royalties or otherwise) to offset the development and
promotion  costs  incurred.  These  and other  statements  about  AURICULIN  are
forward-looking  within the meaning of the PSLRA-95 and actual results  achieved
by the Company may vary.  The actual  results and time frame over which they are
achieved by the Company  will be  determined  by numerous  factors,  principally
including:  the safety and efficacy of AURICULIN in oliguric ARF, which is to be
determined  in the second  Phase III trial  currently  being  conducted  that is
expected to be completed in 1997; the Company's success in enrolling patients in
a timely manner; and the scope of any regulatory  approval for AURICULIN,  which
will require the regulators'  acceptance of the Company's work in a wide variety
of  areas  related  to the  development  of  AURICULIN  and will  depend  on the
regulators'  analysis and  interpretation  of the clinical  trial  results.  See
"Business -- Product Development  Activities and Risks" for a further discussion
of  these  factors  and  their  potential  impact  on  commercialization  of the
Company's products, including AURICULIN.

                                       6
<PAGE>

    Concurrent with the signing of the Collaboration  Agreement,  Genentech made
(i) a $20  million  equity  investment  in Scios by  purchasing  a new  class of
nonvoting  preferred  stock and (ii) a $30 million  loan  commitment,  which the
Company may draw against at any time through  December 2002. See Note 3 of Notes
to Consolidated Financial Statements.

    Scios has received from the FDA Orphan Drug designation of AURICULIN in ARF.
See "Business -- Government Regulation." In March 1994, the Company entered into
a long-term supply agreement pursuant to which a third party has been contracted
to produce bulk form AURICULIN for Scios via a synthetic process.  See "Business
-- Manufacturing."

    Scios'  scientists  were among the first  groups to clone the gene  encoding
human ANP,  and the Company has  produced  the hormone  synthetically  and using
recombinant DNA  technology.  Scios has a worldwide,  semi-exclusive  license to
patent rights of Merck & Co., Inc. ("Merck"),  including an issued United States
patent  covering the ANP product  currently  under  development  by Scios.  This
license is royalty free in the United States.  The patent  licensed to Scios was
issued  to Merck at the  conclusion  of an  interference  proceeding  that  also
involved Scios' patent application  covering human ANP. The patent, which is due
to expire in August  2007,  allows the Company and Merck to prevent  others from
marketing  Scios'  form of ANP in the United  States.  The  Company  also has an
exclusive license under the ANP patent rights of Queens University. These patent
rights  include an issued  European  patent which covers  numerous forms of ANP,
including that being developed by the Company.  This European patent  terminates
in December 2003. See "Business -- Patents and Proprietary Rights" for a further
discussion of the patent situation for AURICULIN.

    Scios  reacquired   rights  to  AURICULIN  from  Wyeth-Ayerst  in  1989.  As
consideration for the reacquired  rights, the Company made an initial payment to
Wyeth-Ayerst  and agreed to make additional  payments out of amounts received by
Scios  (exclusive  of research  and  development  funding)  upon  completion  of
licensing  or  other  arrangements  for  the   commercialization  of  AURICULIN.
Approximately   $5.7  million  in  milestone  payments  remain  to  be  paid  to
Wyeth-Ayerst if AURICULIN is approved for marketing.  Scios' initial research on
AURICULIN was funded by Biotechnology Research Partners, Ltd. to whom Scios owes
certain payments upon the  commercialization of AURICULIN.  See Note 11 of Notes
to Consolidated Financial Statements.

    NATRECOR(R)  BNP. Scios is conducting Phase III clinical studies of NATRECOR
for the treatment of acute congestive  heart failure  ("CHF").  Earlier clinical
studies  conducted  in  approximately  200  patients  demonstrated   significant
improvements  in  key  measures  of  heart  function  following  treatment  with
NATRECOR. The current Phase III studies are intended, if successful,  to provide
the basis for Scios filing an NDA and seeking approval to market NATRECOR in the
United States. The current studies are expected to be completed in 1997 or early
1998,  depending on the rate of subject accrual and, if successful,  the Company
will file an NDA in the United States.  Scios  currently does not plan to market
NATRECOR in its own name outside of North America and is seeking  licensee(s) to
assume such  activities.  Under certain  circumstances  the Company may elect to
allow any such NATRECOR  partner to co-promote  NATRECOR in North America.  This
discussion of NATRECOR includes forward-looking statements within the meaning of
the PSLRA-95,  which are based on current information.  Many factors could cause
actual  results  to  differ  from  those  described  in  these   forward-looking
statements, principally including the rate of patient enrollment in the NATRECOR
trials,  the  occurrence  of unexpected  and severe side effects,  the Company's
ability to select a dosing regimen that  optimizes the  performance of NATRECOR,
the degree of efficacy of NATRECOR,  as shown in the various studies the Company
is conducting, and the reaction of potential partners to NATRECOR. See "Business
-- Product Development Activities and Risks" for a further discussion of factors
that can impact  the  Company's  commercialization  of its  products,  including
NATRECOR.

     Acute CHF affects over one million  people  annually in the United  States.
Because  the market for  treatment  of CHF is very  competitive,  the  Company's
success in commercializing  NATRECOR will be particularly  dependent not only on
strong clinical data but on its ability to produce NATRECOR cost effectively. As
a result,  during 1996 the  Company  shifted  from using  synthetically-produced
NATRECOR  to using  material  produced  by  recombinant  expression.  While more
cost-effective,  this  change to  producing  material  recombinantly  during the
course of the clinical program may create additional  regulatory  challenges for
the development of NATRECOR. See "Business -- Manufacturing."

                                       7
<PAGE>

    The  Company  believes  that it was  the  first  to  discover  human  b-type
natriuretic  peptide  ("BNP"),  whose  gene it  cloned  in 1988 as a part of its
program in natural human peptides that improve heart and kidney  function.  Like
ANP,  BNP is made in the  heart,  and  preclinical  studies at the  Company  and
elsewhere  suggest that BNP has biological  effects similar to ANP in increasing
the  elimination of salt and water from the body,  dilating  blood vessels,  and
decreasing   the  secretion  of  other  hormones  which  lead  to  blood  vessel
constriction  and  elevated  blood  pressure.  The Company has an issued  United
States patent  covering human BNP,  which has a term through May 2009.  This and
other United States  patents  issued to Scios are subject to possible  extension
due to time taken up in the regulatory approval process. In addition, all issued
patents are subject to the risk that they may be  challenged  by another  entity
which may result in a court  invalidating or limiting the patent.  See "Business
-- Patents and Proprietary Rights."

    FIBLAST(R)  trafermin.  FIBLAST  trafermin  is  Scios'  form of human  basic
fibroblast growth factor,  an agent that has been shown to promote  angiogenesis
(the  growth  of new  blood  vessels),  to  directly  stimulate  the  growth  of
connective  tissue,  and to  possess  certain  neuroprotective  properties,  the
mechanisms of which are not yet fully understood.  As described below,  Scios is
working  with two key  partners on the  development  of FIBLAST for a variety of
indications.

    Since 1988, Scios has worked with Kaken  Pharmaceutical Co., Ltd. ("Kaken"),
the  Company's  corporate  partner  for  FIBLAST  in Japan.  Pursuant  to a 1988
agreement,  Kaken has  exclusive  rights to develop  and market  FIBLAST for all
indications  in Japan,  Korea,  Taiwan,  Hong Kong and the People's  Republic of
China. Scios receives research and development support payments,  is entitled to
receive additional  payments as regulatory  milestones are met, and will receive
royalties on any sales of FIBLAST  products by Kaken.  In 1994,  the Company and
Kaken signed a series of agreements expanding the 1988 agreement. Under the 1994
agreements, Scios will manufacture FIBLAST for the next several years for use by
Kaken. The agreements also establish a collaboration  on  manufacturing  process
development  between the  companies  and provide  Kaken with a license to Scios'
manufacturing  technology  for  FIBLAST.  It is  intended  that Kaken be able to
manufacture  FIBLAST for its own use in the future.  Under the 1994  agreements,
Kaken  will make  payments  to Scios for the  supply of  material,  the  process
development collaboration, and the license to FIBLAST manufacturing technology.

    Kaken  conducted two Phase III trials in Japan for  evaluation of FIBLAST in
recalcitrant  wounds.  Based on the results of these studies, in June 1996 Kaken
filed an NDA in Japan for this indication. Before it may begin to market FIBLAST
in Japan, Kaken must obtain approvals from the Japanese authorities with respect
to the NDA for FIBLAST in the target  indication and also for product pricing in
Japan.  Obtaining  these  approvals  is a complex  process  involving a thorough
review  of the  comprehensive  set of data that  Kaken is  required  to  submit.
Approval for Kaken to market the product in Japan will require that the Japanese
authorities  reach the conclusion that such data  demonstrate to the regulators'
satisfaction that FIBLAST is safe and effective in the treatment of recalcitrant
wounds,  and that processes and facilities used by Scios for  manufacturing  the
bulk  drug  substance  used  in  FIBLAST  are  satisfactory.  Although  Japanese
regulators will apply Japanese  standards and practices in reviewing Kaken's NDA
seeking approval to market FIBLAST,  Kaken faces many of the same challenges and
factors that are discussed in "Business -- Product  Development  Activities  and
Risks."

        Following the Company's  completion in 1993 of Phase II clinical  trials
of  FIBLAST  in the  United  States for the  treatment  of  recalcitrant  wounds
(pressure  sores and  neuropathic  ulcers),  the Company  determined not to fund
additional  clinical  studies of FIBLAST for  chronic  illnesses,  except  under
sponsorship of a corporate partner.  This decision was driven by the cost of the
extensive  clinical trial program expected to be required for approval of such a
product in the United  States.  To date, the Company has not entered into such a
partnership  for  the  development  of  FIBLAST  in the  United  States  for the
treatment of recalcitrant wounds.

        In 1996,  Scios signed a Collaboration  Agreement with the  Wyeth-Ayerst
Laboratories  division of American  Home Products  Corporation  ("Wyeth-Ayerst")
creating a joint development and commercialization program to examine the use of
FIBLAST in the treatment of stroke and cardiovascular disorders. Under the terms
of the agreement, Wyeth-Ayerst and Scios will collaborate in the development and
commercialization  of FIBLAST in North  America,  where the companies will share
development  costs  and  profits.   Scios  has  granted  Wyeth-Ayerst  exclusive
marketing rights outside of North America and the Pacific Rim countries licensed
to Kaken.  Scios will receive  royalties on sales  outside of North  America and
payments for bulk drug supply worldwide. Wyeth-Ayerst made a $12 million upfront
payment to Scios in cash and will also pay Scios up to $32 million in  milestone
payments  upon  achievement  of key  future  development  events.  In  addition,
Wyeth-Ayerst  has provided a $12 million line of credit that Scios may draw upon
from time to time through  December 2004 to fund expansion of its  manufacturing
facility for FIBLAST.

                                       8
<PAGE>

      In  extensive  preclinical  studies,  FIBLAST  has been  shown to  protect
neurons from  damaging  effects  associated  with stroke,  including  oxygen and
glucose deprivation, and glutamate release. FIBLAST has demonstrated a reduction
of neuronal death in both permanent  occlusion and reperfusion  animal models of
stroke.  Early in 1996,  Scios  began a Phase  I/II  study  of  FIBLAST  for the
treatment  of  stroke.  At the  request  of  Wyeth-Ayerst  this  trial  has been
expanded.  In  1997,   Wyeth-Ayerst  will  assume  the  responsibility  of  lead
development party for FIBLAST in stroke.

         Scios has also demonstrated in preclinical  studies FIBLAST's potential
to increase blood flow to peripheral blood vessels and reduce the  complications
of peripheral  vascular disease ("PVD") through  angiogenesis,  or the growth of
new blood vessels.  Scios is the lead development party for FIBLAST in PVD and a
Phase II clinical  trial has recently  been  initiated.  In a clinical  study in
collaboration with researchers at the National  Institutes of Health,  Scios and
Wyeth-Ayerst  are exploring  the potential of FIBLAST to increase  blood flow to
the heart in patients with advanced coronary artery disease.

    Scios is obligated  to make  payments to Organon  International  ("Organon")
based  on  amounts  received  by  Scios  upon   commercialization   of  FIBLAST.
Approximately $700,000 remains to be paid under the obligation, which stems from
the Company's 1989  reacquisition of certain FIBLAST rights previously  licensed
to Organon.  The basic research on FIBLAST was funded by Biotechnology  Research
Partners,  Ltd. See Note 11 of Notes to Consolidated  Financial Statements.  See
also  "Business -- Patents and  Proprietary  Rights" for a discussion of FIBLAST
patent issues.

    Other Research.  The Company also has conducted discovery research,  both on
its own and in collaboration with other companies,  to identify other agents for
development or new applications for agents under  development by the Company for
other  indications.  The  current  focus of  Scios'  research  effort  is on the
discovery of agents for  cardiovascular  and renal applications and on agents to
prevent  or delay  the onset of  Alzheimer's  disease.  Scios  has been  granted
patents on a form of vascular  endothelial  growth factor (VEGF). The Company is
investigating  the use of this  form of VEGF in a  variety  of  disease  states.
Another  company holds issued patents on a competing form of VEGF. In July 1992,
Scios  formed a research  alliance  with Marion  Merrell  Dow,  Inc.  ("MMD") to
jointly develop new therapies for Alzheimer's  disease based on investigation of
the beta-amyloid  precursor protein.  MMD merged with Hoechst Roussel in 1995 to
form Hoechst Marion  Roussel,  Inc.  ("HMR") and,  effective  December 1996, HMR
terminated  the  collaboration.  The parties are in  discussions  to clarify the
rights of each  party to use the  technology  developed  in the  program.  HMR's
decision to terminate this  collaboration  represents an example of how a change
in the priorities of a corporate  sponsor,  such as HMR, can impact Scios.  This
risk is discussed in the section "Business -- Product  Development  Activity and
Risks."  Scios  is  seeking  a new  collaborator  for its  Alzheimer's  research
program.  In 1995,  the  Company  was  issued a United  States  patent  covering
transgenic mice that develop brain tissue deposits characteristic of those found
in humans with Alzheimer's disease.

Additional Projects

    The Company has from time to time  pursued  product  development  activities
outside of the focus areas described above, some of which programs are discussed
below.  Scios  intends  to divest or  otherwise  leverage  technologies  that it
concludes are not central to its long-term business strategy.

    BNP Diagnostic.  Third-party  researchers  have determined that the level of
circulating brain natriuretic peptide (BNP) may be a good basis for a diagnostic
to identify and track patients  suffering from congestive  heart failure.  Scios
has  licensed  to  Shionogi  and Co.,  Ltd.  ("Shionogi")  the  right  under the
Company's  patent  position  on BNP to develop  diagnostic  products in Japan in
exchange  for  royalties  on  product  sales.  Shionogi  began  selling  its BNP
diagnostic  in  Japan in  1996.  Scios  has  also  granted  Biosite  Diagnostics
Incorporated the  nonexclusive  right under the Company's BNP patents to develop
BNP  diagnostics in the United  States,  and the Company is now seeking to enter
into agreements with other companies to commercialize the diagnostic application
of its BNP patent rights in additional territories.

    CNS   Disorders;   Guilford   Pharmaceuticals.   In  June   1994,   Guilford
Pharmaceuticals Inc. ("Guilford"),  at that time a majority-owned  subsidiary of
the Company, completed an initial public offering of $15 million of common stock
to pursue the  development  of  pharmaceutical  products  for the  treatment  of
diseases of the central  nervous system  ("CNS").  Following  subsequent  equity
offerings  by  Guilford,  Scios'  ownership  interest in  Guilford is  currently
approximately  10%.  Scios  had  previously   transferred  to  Guilford  certain
neuroscience  technology  originally  developed  by Nova,  and had  licensed  to
Guilford the  GLIADEL(R)  implant  project and related drug delivery  technology
described  below for  application  in the  treatment  of  tumors of the  central
nervous system and cerebral edema ("Guilford Field"). The most advanced Guilford
product is GLIADEL,  which was  approved for  marketing in the United  States in
1996.

                                       9
<PAGE>

    Insulinotropin.  The  Company  initially  developed  insulinotropin  under a
collaboration  begun with Pfizer Inc  ("Pfizer") in 1988.  After several  years,
Pfizer assumed responsibility for clinical development.  As part of that effort,
Pfizer  initiated a  collaboration  with Novo  Nordisk  A/S of Denmark,  a world
leader in  insulin  and  diabetes  care  products.  In 1996,  Pfizer  elected to
terminate  its  license  from Scios on  insulinotropin.  Following a three month
review of the  product,  Novo Nordisk  acquired an exclusive  license from Scios
under a new  agreement  providing  for Scios to  receive  from Novo  Nordisk  an
upfront  payment,  potential  milestone  payments based on time and events,  and
royalties on product  sales.  Novo Nordisk is now  responsible  for  development
activities  for  insulinotropin.  Insulinotropin  appears to be a potent peptide
that stimulates  insulin release when blood sugar levels are above normal.  Type
II diabetics do not release  enough insulin from the pancreas when blood glucose
levels  rise in response  to eating a meal and they  become  progressively  more
resistant  to insulin  action in  stimulating  glucose  uptake by muscle and fat
tissue.  Insulinotropin  controls  blood glucose  levels in Type II diabetics by
stimulating  insulin  release  and  perhaps by  overcoming  insulin  resistance.
Present  therapies for Type II diabetics  include  insulin  injections  and oral
hypoglycemic  agents,  which can induce  dangerously low blood sugar levels.  If
insulinotropin stimulates insulin release only when blood sugar levels are above
normal, it may have a lower risk of this serious side effect.  The Company holds
an exclusive  license to patent  applications  covering  insulinotropin  held by
Massachusetts  General Hospital,  which rights were licensed to Novo Nordisk.  A
United  States patent  licensed  exclusively  to the Company  covers the form of
insulinotropin  being  developed by Novo Nordisk under license from the Company.
The term of the patent  extends  through June 2009. An additional  issued patent
and a pending application cover other forms of insulinotropin.

    Drug Delivery Systems. Prior to Scios' acquisition of Nova in 1992, Nova had
been developing  certain drug delivery  systems.  Its two most advanced projects
were the  GLIADEL  implant to treat  primary  brain  cancer and the  SEPTACIN(R)
implant for the  treatment of  osteomyelitis,  a serious bone  infection.  These
projects were developed  pursuant to a license  agreement with the Massachusetts
Institute  of  Technology  ("MIT")  relating to MIT's  BIODEL(R)  drug  delivery
technology.  As noted above, the Company licensed a portion of the drug delivery
technology,  including  GLIADEL,  to Guilford.  In 1994, the Company licensed to
another third party the drug delivery  technology,  including SEPTACIN,  for all
uses outside the Guilford Field.  Scios  thereafter  assigned its BIODEL license
rights back to MIT, which will administer  these  licenses.  The Company and MIT
will receive  royalty and milestone  payments under the license  agreements with
Guilford and the other  licensee as products are  developed.  The  licensees are
also obligated to meet certain  diligence  standards in pursuing  development of
their  respective  product  candidates.  The GLIADEL and SEPTACIN  projects were
undertaken by the Company on behalf of Nova Technology Limited Partnership,  the
limited  partnership  that  funded  Nova's  research  and  development  on these
projects.  See Note 11 of  Notes  to  Consolidated  Financial  Statements  for a
description of the Company's payment obligations to former limited partners.

    Human Lung  Surfactant  ("hLS").  In early 1996, the Company entered into an
agreement with Byk Gulden  Pharmazeutika  ("Byk  Gulden"),  transferring  to Byk
Gulden all of the  Company's  interest in a portfolio  of issued  patents on the
protein  components of lung  surfactant,  some of which were based on Scios' own
work and some of which Scios had  obtained  under an  assignment  of patents and
patent  applications owned by Children's  Hospital Medical Center of Cincinnati.
The  Company  received  an initial  payment and will  receive  additional  fixed
payments if Byk Gulden  commercializes  an hLS  product.  Scios will not receive
royalties on sales by Byk Gulden.

Marketing and Sales

     Once they have been approved for marketing,  the Company ultimately intends
to sell certain of its proprietary products in the United States through its own
sales  force for some or all  approved  indications.  This  could be done by the
Company  alone or  jointly  with  other  companies,  such as is the case for the
Company's co-promotion agreement on AURICULIN with Genentech.  Presently,  Scios
generates revenues by marketing products that were developed by others.
                                       10
<PAGE>

    Third-Party  Products.  The Company has a sales  force of  approximately  85
representatives  who are  employed  exclusively  by the  Company  and  work on a
part-time basis marketing psychiatric products. The Company currently markets in
the United  States four  psychiatric  products  under  license  from  SmithKline
Beecham  Corporation  ("SB")  and  co-promotes  two  other  products:  HALDOL(R)
Decanoate  (haloperidol),  a depot injection product to treat schizophrenia that
is distributed by Ortho-McNeil Pharmaceutical ("Ortho-McNeil"),  an affiliate of
Johnson & Johnson,  and EFFEXOR(R)  (venlafaxine HCl), an antidepressant that is
marketed by  Wyeth-Ayerst.  Since 1993, the Company has jointly  promoted HALDOL
with Ortho-McNeil for the treatment of schizophrenia.  Under the agreement,  the
Company  receives  quarterly  payments  based  on total  sales  of the  product.
Ortho-McNeil  manufactures  and distributes  HALDOL,  and generally  indemnifies
Scios against product liability claims. The five-year  agreement may be extended
up to an additional three years upon the Company's  attainment of revenue goals.
In 1996,  Scios and  Wyeth-Ayerst  entered  into an agreement  regarding  Scios'
promotion of EFFEXOR to selected  psychiatrists in the United States.  Under the
four-year  agreement,  Scios is compensated  based on increases in prescriptions
written by the psychiatrists to whom Scios promotes.  Wyeth-Ayerst  manufactures
and  distributes  EFFEXOR,  and  generally  indemnifies  Scios  against  product
liability claims.

    The Company has exclusive  rights to market the following SB products in the
United States:  ESKALITH(R)  and ESKALITH  CR(R)  (lithium) for the treatment of
manic  depressive  illness,   THORAZINE(R)   (chlorpromazine)  and  STELAZINE(R)
(trifluoperazine)   for  the   treatment  of   schizophrenia,   and   PARNATE(R)
(tranylcypromine)  for  the  treatment  of  depression  (collectively,  the  "SB
Products").  SB currently  manufactures and distributes the SB Products.  SB may
discontinue manufacturing one or more of the products if it gives the Company at
least 12 months' notice,  in which case Scios has the right to manufacture  such
product(s). SB is responsible for all ancillary matters relating to sales of the
SB Products (including various  administrative tasks) and for the maintenance in
good standing of all new drug applications with respect to the SB Products.  The
agreement  also  grants  Scios  certain  rights to  indemnification  from SB for
product liability claims.  The Company is obligated to spend certain amounts for
marketing  support  based on the prior  year's net sales and to reimburse SB for
certain  third-party  royalty  payments.  Scios pays SB 40% of the Company's net
profits (as defined in the Company's agreement with SB) from United States sales
of the SB Products. See Note 3 of Notes to Consolidated Financial Statements.

    HALDOL,  EFFEXOR and the SB Products all face competition which is likely to
become greater over time. For the SB Products,  unit volume for certain products
has been  eroding and can be  expected  to continue to erode due to  competition
from generic products sold at substantially  lower prices.  Generic  competition
may also develop for other products. These are forward-looking statements within
the meaning of the  PSLRA-95.  Numerous  factors will  influence the impact that
competitive  products will have on the  Company's  revenues from the SB Products
and the Company's co-promotion activities.  These factors include the success of
the Company's and its partners' marketing strategies and efforts, the actual and
perceived features of competing products,  the amount of the difference in price
of competing  products,  and the marketing  effort by third parties on competing
products.  Although  past  decreases in unit sales of the SB Products  have been
partially offset by price  increases,  there can be no assurance that the market
will accept any additional price increases.  Among the SB Products,  the Company
has placed particular marketing emphasis on those product formulations,  such as
ESKALITH CR (a controlled release  formulation),  where generic  equivalents are
less available.

    Although  the Company is seeking to acquire  the right to market  additional
products,  numerous factors will determine  whether and when the Company is able
to do so and  then  the  degree  to  which  the  Company  realizes  net  revenue
contribution from marketing such additional  products.  Factors  influencing the
availability  of such  additional  products  on terms  favorable  to the Company
include  the  ability of the Company to  demonstrate  success  under its current
agreements,  the  willingness of other  companies to enter into such  agreements
with the Company,  which will be based in part on where such companies  elect to
deploy their own  marketing  resources,  and  competition  from other  companies
offering marketing assistance similar to that offered by the Company.

    Proprietary  Products.   The  Company  currently  plans  to  participate  in
marketing  certain of its proprietary  products in the United States when and if
approved by the FDA. This section on Proprietary  Products describes some of the
challenges  the  Company  will  face in  developing  the  capability  to  market
successfully   its  own   products.   This   discussion   necessarily   contains
forward-looking   statements   within  the  meaning  of  the   PSLRA-95.   These
forward-looking  statements are based on current  expectations,  and the Company
assumes no obligation to update this information.  Numerous  factors,  including
those discussed below, could cause actual results to differ from those described
in these forward-looking  statements.  Under certain circumstances,  the Company
could  abandon  its plans to market  certain of its own  products  in the United
States in favor of granting  outright  licenses of its products and  technology.
The Company has pursued  (and  expects to pursue for the  foreseeable  future) a
strategy of entering into  licensing  arrangements  with other  companies as the
means to make its products available outside of the United States.

                                       11
<PAGE>

    Scios believes that its experience in marketing  third-party  products under
arrangements  such as those  described above will prove useful as it prepares to
market its own products.  However, to date, Scios' marketing experience has been
limited to  psychiatric  products,  and the Company does not  currently  have in
place all of the resources to market the products it is seeking to develop.  The
commercialization  of the  Company's  major  products  will require  significant
financial resources, as well as sales, marketing and distribution  capabilities.
In order to provide funds and expertise to meet these requirements, particularly
outside of North  America,  the Company will consider  entering into  additional
corporate partnerships with established pharmaceutical companies, as it has with
Genentech for the  co-promotion of AURICULIN and  Wyeth-Ayerst for the promotion
of FIBLAST for stroke and  cardiovascular  disorders.  There can be no assurance
that the Company will be able to enter into such partnerships on favorable terms
or develop such a marketing  capability  on its own.  Scios  believes  that such
collaborations  may enable it to speed the timing of product launch and increase
market  penetration  of  selected  new  therapies.  However,  such a  partnering
arrangement  could  also  result in a lower  level of income to Scios than if it
marketed the products entirely on its own. See "Business -- Product  Development
Activities and Risks."

    The Company's ability to commercialize its products  successfully may depend
in part on the extent to which  reimbursement  for the cost of such products and
related  treatment  will be  available  from  government  health  administration
authorities,   private  health  coverage   insurers  and  other   organizations.
Government and other third-party  payors are increasingly  attempting to contain
healthcare  costs by limiting both coverage and the level of  reimbursement  for
new  therapeutic  products.  Market  acceptance  of  Scios'  products  would  be
adversely  affected  if  adequate  coverage  and  reimbursement  levels  are not
provided  for  approved  uses  of  Company  products.  In  addition,  in view of
expressed  governmental  concerns over drug prices and other  healthcare  costs,
there can be no  assurance  that  future  government  and private  cost  control
initiatives  will not adversely  affect the Company's  ability to maintain price
levels  on  its  products   sufficient  to  realize  an  appropriate  return  on
development efforts.

Manufacturing

    Scios has  concentrated  its resources on product  discovery and development
prior to investing  substantially  in  manufacturing  capability.  To date,  the
Company  has  produced  only  FIBLAST  in its own  facility  and relies on third
parties for the manufacture of other products, including AURICULIN and NATRECOR.
Scios has a production  facility which it believes enables it to produce FIBLAST
and  potentially  other  products for itself and others under  requirements  for
current Good Manufacturing  Practices  ("cGMP").  However,  the Company does not
currently  possess the staff or facilities  that may be necessary to manufacture
any product in the commercial  quantities that may be required in the long term.
The strategy of building or acquiring commercial-scale  manufacturing facilities
or  utilizing  third-party  facilities  only as the need arises  carries with it
certain risks,  as there can be no assurance that such  facilities can be built,
acquired or used on commercially  acceptable terms or that Scios will be able to
meet  manufacturing  quantity and quality  requirements  through the use of such
arrangements.

    AURICULIN is currently produced by third-party  manufacturers under contract
to Scios.  The Company has a long-term  agreement for the supply of AURICULIN in
bulk form,  and has fill and finish  services  performed by another third party.
The Company  believes that it would not be cost  effective to qualify  alternate
suppliers at this time.  However,  an inability of either the Company's  bulk or
fill and finish  manufacturer  to provide  material  to Scios on a timely  basis
would cause  delays in supply that could have a material  adverse  effect on the
Company's business. The Company has developed with a third party the process for
the  recombinant  production  of  NATRECOR.   Having  a  low-cost  manufacturing
capability for NATRECOR and smoothly integrating product produced by such method
into clinical development  activities are expected to be keys to commercializing
this  product  successfully  and  on a  timely  basis.  Failure  to do so  could
adversely  impact  the  commercial  success of the  product.  See  "Business  --
Competition."

    To the  extent  Scios has from time to time had  capacity  available  in its
production facility,  it has performed contract  manufacturing for third parties
and the Company has  produced for  third-party  customers  pharmaceutical  grade
supplies of products of interest to such third  parties.  The Company may engage
in similar work in the future.

    Ortho-McNeil  manufactures HALDOL,  Wyeth-Ayerst manufactures EFFEXOR and SB
manufactures  the SB Products.  If SB were to discontinue  manufacturing  the SB
Products and the Company  wished to continue  selling the products,  the Company
would have to develop  additional  facilities to manufacture  independently on a
large scale or enter into an arrangement  with a third party to manufacture such
products. See "Business -- Marketing and Sales."

                                       12
<PAGE>
Patents and Proprietary Rights

    Scios is seeking patent  protection for proprietary  technology and products
in the United States and abroad to prevent others from unfairly  capitalizing on
its investment in research.  Other companies engaged in research and development
of new health care products based on  biotechnology  also are actively  pursuing
patents for their technologies,  which they consider to be novel and patentable.
Scios also relies and will  continue to rely upon trade  secrets and know-how to
develop  and  maintain  its  competitive  position.  There can be no  assurance,
however, that others will not develop similar technology or that confidentiality
agreements on which the Company relies to protect trade secrets will be honored.

    The Company  currently owns or holds exclusive  rights to  approximately  53
issued United States patents and 27 United States  pending  patent  applications
covering its proprietary technology and products. The Company also files foreign
applications  corresponding  to most of its United States  applications.  Scios'
issued   patents   include   patents  on   AURICULIN,   NATRECOR,   FIBLAST  and
insulinotropin.  The Company's patent position with respect to certain principal
products under  development is described  above in the section  discussing  each
product. See "Business -- Product Development Activities and Risks." If a patent
issues  prior to  marketing  approval,  as has  been  the  case  with all of the
Company's  issued  patents to date,  Scios can apply for extension of the patent
term for a limited  period of time to make up for a portion of the  patent  term
lost to the  regulatory  approval  period.  The actual  period of the  extension
varies but  generally  cannot exceed five years.  In certain of its  third-party
agreements,  the absence of a patent covering a product  licensed by Scios could
reduce the royalties due to the Company under the agreements.

    This  section   entitled   "Patents   and   Proprietary   Rights"   contains
forward-looking   statements  under  the  PSLRA-95.  Actual  results  will  vary
depending on numerous  factors,  many of which are discussed.  Investors  should
appreciate that the patent position of biotechnology and pharmaceutical firms is
generally  highly  uncertain and involves  complex legal and factual  questions.
Although  Scios  believes  it has  strong  patent  positions  on  certain of its
products,  there can be no  assurance  that any  patent  will  issue on  pending
applications  of the Company,  or that any patent issued will afford the Company
significant  commercial  protection  against  competitors  for the technology or
product  covered by it, or that patents  will not be infringed  upon or designed
around.  Third parties have filed  applications for, or have been issued patents
relating to,  products or  processes  which are similar to or  competitive  with
certain of the Company's  products or processes.  Scios is incurring and expects
to  continue  to incur  substantial  costs in  interference  proceedings  and in
defending the validity or scope of its patents or in challenging the validity or
scope of competing patents. The Company is unable to predict how the courts will
resolve issues  relating to the validity and scope of such patents.  If any such
patent were to be interpreted  to cover any of the Company's  products and could
not be  licensed,  circumvented  or shown to be  invalid,  the results of Scios'
future  operations could be materially and adversely  affected.  Described below
are patent positions of other companies of which Scios is aware that potentially
overlap the Company's principal product development areas discussed above.

    AURICULIN.  On June 14, 1988,  a United  States  patent  issued to Organogen
Medizinisch-Molekularbiologische Forschungsgesellschaft m.b.H. containing claims
to  biologically  active  fragments  of  cardiodilatin,  a  natriuretic  peptide
precursor.  Scios  believes that the claims of the patent may not  reasonably be
construed  to cover the form of ANP being  developed by Scios and, to the extent
any claims of the  patent  may be  interpreted  to cover  AURICULIN,  reasonable
grounds exist for asserting the invalidity of such claims. If any claims of this
patent were  determined to be valid and construed to cover the form of ANP being
developed by Scios,  Scios' ability to develop AURICULIN  commercially  might be
hindered or  prevented  if it were unable to obtain a license.  A  corresponding
patent has been issued by the European  Patent Office.  This patent is currently
involved in an opposition proceeding in Europe in which Scios is participating.

    NATRECOR.  Scios has been issued United States and European patents covering
human  BNP.  Scios  is  aware  that  Daiichi  Pharmaceutical  Co.,  Ltd.,  Tokyo
("Daiichi")  has filed patent  applications on porcine BNP in Japan and on human
BNP worldwide.  The filing dates of the Daiichi applications  covering human BNP
are later than those of the Company. On July 12, 1995 the European Patent Office
issued a patent to Daiichi containing claims that overlap with certain claims of
Scios'  issued  European  patent.  Scios has filed an  opposition to the Daiichi
patent. If Scios does not prevail in the opposition  proceeding,  Scios' ability
to develop NATRECOR  commercially in Europe might be hindered or prevented if it
were unable to obtain a license.

    FIBLAST.  In February 1991, a United States patent with one claim covering a
form of  fibroblast  growth  factor (FGF)  protein was issued to Synergen,  Inc.
("Synergen"),  which was later  acquired  by Amgen Inc.  In June 1991,  a United
States  patent  with one  claim  covering  the DNA for the same  form of FGF was
issued  to  Synergen.  Based on a  review  of the  publicly-available  documents
relating to these  patents,  Scios believes that the Synergen form of FGF or DNA
differs  from the form of FGF  produced  by the  Company.  On  August  8,  1995,
following a decision favorable to Scios in a patent interference proceeding with
the Salk  Institute for  Biological  Studies  ("Salk"),  Scios received a United
States patent covering DNA sequences, expression vectors and microorganisms used
in the recombinant production of human basic FGF. On May 7, 1996, Scios received
a United States patent covering the  recombinant  production of human basic FGF.
On  February  18,  1997,   Scios  received  a  United  States  patent   covering
recombinantly produced human basic FGF.

                                       13
<PAGE>

    In October 1992, a United  States  patent was issued to Salk which  contains
claims  directed to  substantially  pure mammalian  basic FGF containing the 146
amino acid  sequence  of bovine  basic FGF or a naturally  occurring  homologous
sequence  of  another  mammalian  species.  If any  claim  of this  patent  were
determined  to be valid and  construed  to cover  Scios'  human  basic FGF,  the
Company's ability to develop basic FGF might be hindered or prevented if it were
unable  to  obtain  a  license.   Scios'   outside   counsel  has  reviewed  the
publicly-available  documents  relating  to the Salk  patent.  Based  upon  this
review, such counsel has opined that, to the extent any claims of the patent may
be  interpreted to cover human basic FGF, such claims are overly broad and would
likely be held invalid by an informed court.

    In May 1994, the European Patent Office issued European Patent No. 0 248 819
to Scios  covering  recombinantly-produced  trafermin,  Scios' form of basic FGF
known by the product name FIBLAST. An opposition  proceeding has been instituted
against this patent by Chiron  Corp.  and  Pharmacia  S.p.A.  In June 1996,  the
Opposition  Division of the European  Patent  Office  upheld the validity of the
Scios patent;  however,  the opponents have filed an appeal against this ruling.
In August 1994, the European  Patent Office issued European Patent No. 0 228 449
to Salk  covering  the  146  amino  acid  sequence  of  bovine  basic  FGF or an
equivalent  or analog  thereof.  The  Company  has filed an  opposition  to this
patent.  The results of these  opposition  proceedings  cannot be predicted with
certainty.

    In March 1994, the Company obtained a non-exclusive license to make, use and
sell  FIBLAST  under  a  United  States  patent  issued  to  Harvard  University
containing  claims to purified cationic (basic) FGF. The Harvard patent is based
on a patent  application having a filing date earlier than the application which
formed the basis for the Salk patent.

Trademarks.  AURICULIN(R),  NATRECOR(R) and FIBLAST(R) are registered trademarks
of Scios. ESKALITH(R), ESKALITH CR(R), THORAZINE(R), STELAZINE(R) and PARNATE(R)
are  registered  trademarks  of  SB.  HALDOL(R)  is a  registered  trademark  of
McNeilab, Inc. EFFEXOR(R) is a registered trademark of Wyeth-Ayerst.

Competition

    Competition  is intense in the  development of  biopharmaceutical  products,
particularly  in  the  development  of  products   through  the  application  of
biotechnology.  There  are  numerous  companies  and  academic  research  groups
throughout the world engaged in similar  research and  development.  Some of the
Company's competitors,  including some of its licensees, are working on products
similar  to  those  being  developed  by  Scios.  Many of these  companies  have
substantially greater financial,  marketing and human resources than Scios. With
respect to AURICULIN, Scios is not aware of any currently-marketed treatment for
ARF but believes other  companies are attempting to develop forms of natriuretic
peptides  and  certain  growth  factors for  indications  similar to those being
pursued by Scios.  In the case of  NATRECOR,  a number of  products  are already
marketed  for the  treatment  of acute  CHF.  Hence,  the  Company  will need to
demonstrate   strong  clinical  results  and  an  ability  to  produce  NATRECOR
cost-effectively  in order to introduce  NATRECOR into this competitive  market.
FIBLAST faces potential competition from other growth factors.

    There  can be no  assurance  that  technological  developments  or  superior
marketing  capabilities  possessed by competitors will not materially  adversely
affect the commercial potential of the Company's products.  In addition,  if the
Company  commences  significant  commercial  sales  of  products,  manufacturing
efficiency and marketing  capability  are likely to be  significant  competitive
factors.  With respect to products no longer covered by patents,  such as the SB
Products, Scios faces competition from companies offering generic products.

                                       14
<PAGE>

    The Company  believes  that the  competitive  success of the Company will be
based  primarily  on  scientific  and  technological   superiority,   managerial
competence in identifying and pursuing opportunities,  operational competence in
developing,  protecting,  producing and marketing products, and obtaining timely
regulatory agency approvals and adequate funds. Achieving success in these areas
will  depend  on the  Company's  ability  to  attract  and  retain  skilled  and
experienced personnel,  to develop and secure the rights to advanced proprietary
technology and to exploit  commercially  its technology prior to the development
of  competitive  products by others.  Scios expects that there will be continued
competition for highly qualified scientific, technical and managerial personnel.
This section entitled Competition contains forward-looking statements within the
meaning of the PSLRA-95.  Numerous  factors,  including  the factors  identified
above,  could  cause  actual  results to differ  from those  described  in these
forward-looking statements.

Government Regulation

    The  industry  in which the  Company  participates  -- the  development  and
marketing of pharmaceutical products -- is heavily regulated. As is true for all
companies  developing  pharmaceuticals,  the Company's  research and development
activities  and the  production  and  marketing  of its  products are subject to
extensive   regulation   for  safety  and  efficacy  by  numerous   governmental
authorities  in the United  States and other  countries.  This  regulation  is a
significant  factor in the  production  and marketing of the products  resulting
from  Scios'  research  and  development  activities.  Testing,  production  and
marketing of  pharmaceutical  products for human use require approval of the FDA
and  comparable  authorities  in other  countries.  Over the next several years,
Scios expects to increase  substantially its internal resources and expenditures
to meet these  requirements for the products it is developing.  See "Business --
Product Development Activities and Risks."

    The procedure for seeking and obtaining the required governmental  approvals
for a new  product  involves  many  steps,  beginning  with  animal  testing  to
determine safety and potential toxicity.  In addition,  extensive human clinical
testing is required to demonstrate the efficacy, optimal dose and safety of each
product.  The time and  expense  required  to perform  clinical  testing can far
exceed the time and expense of developing the product prior to clinical testing.
Whether  undertaken by the Company or its  commercial  partners,  the process of
seeking  and  obtaining  these  approvals  for a new product is likely to take a
number of years and  involves  the  expenditure  of  substantial  resources.  In
addition,  there can be no assurance  that any of the  Company's  products  will
obtain the  necessary  approvals on a timely  basis,  if at all. The  regulatory
environment  is  constantly  evolving and one of the demands on companies in the
pharmaceutical  industry is to take account of and  anticipate  these changes in
order to minimize  negative  impact on the  Company or its  product  development
timelines.  As a  developer  of  pharmaceutical  products,  the  Company and its
commercial   partners  must  also  deal  with   differences  in  the  regulatory
requirements  of  different  countries.  Although  there is an effort at greater
harmonization of regulatory  standards,  differences still impact whether and in
what time frame a product may be approved in a  particular  country,  if at all.
Because of these differences between countries, approval in one country does not
assure approval in another.

    Even if initial FDA approval is obtained for a product,  further studies may
be required to provide additional data on safety or to gain approval for the use
of a product as a treatment for clinical  indications other than those initially
targeted.  Moreover,  the FDA may  reconsider its approval of any product at any
time and may withdraw such approval. In addition,  before the Company's products
can be marketed in foreign countries, they are subject to regulatory approval in
such  countries  similar to that  required  in the United  States.  Accordingly,
numerous  factors  will  impact the timing,  extent and value of any  regulatory
approvals that may be obtained for the Company's products,  including changes in
regulatory requirements, which may either decrease or increase the burden on the
Company,  the level of side  effects  exhibited  by the  Company's  products  as
compared to their beneficial effects,  the availability of adequate resources to
regulatory  agencies which will impact the speed of regulatory  review,  and the
price the Company is able to charge for its products.

                                       15
<PAGE>

    The Orphan  Drug Act  currently  provides  incentives  to  manufacturers  to
develop and market drugs for rare  diseases or conditions  affecting  fewer than
200,000  persons in the United States at the time of application for orphan drug
designation.  A drug that  receives  orphan  drug  designation  and is the first
product to receive FDA marketing approval for its product claim is entitled to a
seven-year  exclusive  marketing  period in the United  States for that  product
claim.  However,  a drug that is  considered  by the FDA to be different  from a
particular  orphan drug is not barred from sale in the United  States during the
seven-year  exclusive  marketing  period.  The Company has received from the FDA
orphan drug  designation of AURICULIN in ARF.  Various  amendments of the Orphan
Drug Act have been  considered by Congress from time to time,  some of which, if
passed, could reduce the benefits to Scios of orphan drug status.

        FDA  regulations  require  that any drug to be tested in humans  must be
manufactured  according to cGMP  regulations.  This has been extended to include
drugs that will be tested for safety in  animals,  in support of human  testing.
The cGMPs set certain minimum  requirements for procedures,  record-keeping  and
the physical characteristics of the laboratories used in the production of these
drugs.  In  addition,  various  federal,  state and local  laws and  regulations
relating to safe working conditions,  laboratory practices, the experimental use
of animals,  and the  storage,  use and  disposal of  hazardous  or  potentially
hazardous  substances,  including  radioactive  compounds and infectious disease
agents,  used in  connection  with  the  Company's  research  work are or may be
applicable to such  activities.  They include,  among others,  the United States
Atomic  Energy Act,  the Clean Air Act,  the Clean Water Act,  the  Occupational
Safety  and  Health  Act,  the  National  Environmental  Policy  Act,  the Toxic
Substances Control Act, and the Resource Conservation and Recovery Act, national
restrictions on technology transfer, import, export and customs regulations, and
other present and possible future federal, state and local regulations. Although
the Company  believes that its safety  procedures  for handling and disposing of
hazardous materials comply with prescribed  regulations,  the risk of accidental
contamination  or injury from these materials  cannot be completely  eliminated.
The  Company  may also  incur  substantial  costs to comply  with  environmental
regulations  if  the  Company  develops  additional  manufacturing  capacity  or
otherwise changes its operations. For example, in connection with the closure of
its Baltimore  research and  development  facility in 1994 to  consolidate  such
activities  at its  California  headquarters,  the  Company  incurred  costs  of
approximately  $370,000  for  chemical  disposal,  storage  and  related  costs.
Furthermore,  the Company employs third-party contractors that it believes to be
reliable to perform  certain work in  connection  with the disposal of hazardous
materials  generated in the  Company's  research in compliance  with  applicable
laws.  Notwithstanding such reliance, the Company may remain responsible for the
materials and the actions of its  contractors  related to such  materials.  From
time to time, the Company has been notified that certain of its  contractors may
not have disposed of such materials in full  compliance with applicable laws and
that the  Company may be required  to  contribute  to the cost of  environmental
clean-up  efforts.  See  Item 3 below  and  Note  10 of  Notes  to  Consolidated
Financial Statements.

Employees

    The Company had 335  employees as of December  31,  1996,  of which 190 were
engaged in research,  product and  clinical  development  and 79 were  part-time
employees (primarily its sales force).

Item 2.  PROPERTIES

    The Company's headquarters facility in Mountain View,  California,  consists
of three  buildings  owned by the  Company and land  occupied  under a long-term
ground lease. The ground lease rates are fixed through July 2010. Future minimum
ground lease payments over the next five years total approximately $913,000. The
three buildings represent 98,000 square feet of office and laboratory space. The
Company  presently  occupies  approximately  88,000  square  feet and leases the
remaining  space.  The  Mountain  View  facility  includes a 13,000  square foot
combination  process and product  development and biological testing facility in
which Scios has produced  bulk and clinical  supplies of FIBLAST.  In 1995,  the
Company  leased a 52,000  square foot  building in  Sunnyvale,  California,  and
constructed research laboratories.  The Company relocated its discovery research
group to the Sunnyvale  facility in September  1996. The Company's  annual lease
payments for the  Sunnyvale  facility are  approximately  $700,000.  The Company
expended  approximately  $6.7  million  in  capital  expenditures  in  1996  and
anticipates spending approximately $2.5 million in capital expenditures in 1997.

    Prior to February 1995,  the Company  occupied under lease a total of 57,428
square feet of administrative and laboratory  facilities in Baltimore,  Maryland
(the "Holabird  Facility").  In 1994, the Company  consolidated its research and
development  activities at the Holabird Facility with those in California.  As a
result, the Company laid off certain employees, transferred others to California
and, in early 1995,  moved its  Baltimore  commercial  operations  and  clinical
groups,  previously located at the Holabird Facility,  to a new site in downtown
Baltimore.  In February  1995,  Scios  purchased  the  Holabird  Facility for $3
million  pursuant  to an  option  contained  in  the  lease  and  also  received
assignment of the  underlying  ground lease,  which has a term through 2012. The
Company is endeavoring to sell the Holabird Facility.

                                       16
<PAGE>

Item 3.  LEGAL PROCEEDINGS

    In  September  1996,  the  United  States  District  Court for the  Northern
District of California dismissed with prejudice a lawsuit that had been filed by
certain  stockholders in May 1995 against the Company and Richard L. Casey,  its
chairman and chief executive officer, on behalf of the individual plaintiffs and
on behalf of other  purchasers  of the  Company's  stock  during the period from
October  6, 1993 to May 2,  1995.  The  action  alleged  violations  of  federal
securities  laws,  claiming  that the  defendants  issued a series  of false and
misleading  statements,  including  filings  with the  Securities  and  Exchange
Commission,  regarding the Company and clinical trials involving AURICULIN.  The
plaintiffs  have filed notice that they will appeal the District  Court's ruling
in favor of the Company.

    In  November   1995,   the  Company  was  notified  by  the  United   States
Environmental  Protection  Agency  ("EPA")  that  it  may  have a  liability  in
connection  with the  clean-up of a toxic waste site  arising out of the alleged
disposal of  hazardous  substances  by a  subcontractor  of Nova  Pharmaceutical
Corporation,  which was  acquired by the Company in 1992.  The Company is one of
many  potentially  responsible  parties that have been  identified as associated
with this  specific  site.  The Company is in the process of  responding  to the
EPA's request for additional  information on materials disposed of at this site.
The ultimate outcome of this action cannot presently be determined. Accordingly,
no  provision  for any  liability or loss that may result from  adjudication  or
settlement  thereof  has been made in the  accompanying  consolidated  financial
statements.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were  submitted to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report.

                                   MANAGEMENT

Executive Officers

    The  executive  officers of the Company and their ages at March 17, 1997 are
as follows:
<TABLE>
<CAPTION>

    Name                               Age                   Position
     <S>                               <C>                   <C>    

    Richard L. Casey                   50                   Chairman of the Board, President and
                                                            Chief Executive Officer

    Roberto P. Rosenkranz, Ph.D.       46                   Executive Vice President and
                                                            Chief Operating Officer

    Elliott B. Grossbard, M.D.         49                   Senior Vice President, Medical Development

    Thomas L. Feldman                  46                   Vice President of Commercial Operations

    John A. Lewicki, Ph.D.             45                   Vice President of Research

    John H. Newman                     46                   Vice President of Legal Affairs,
                                                            General Counsel and Secretary

    Armin H. Ramel, Ph.D.              71                   Vice President of Product Development
</TABLE>

                                       17
<PAGE>

    Mr. Casey is Chairman of the Board, President and Chief Executive Officer of
Scios Inc. He joined Scios in December  1987 and has served as a Director  since
that time.  From early 1985 to 1987, he was with ALZA  Corporation  as Executive
Vice  President  and  President  of ALZA  Pharmaceuticals.  From 1976 to 1985 he
worked for  Syntex  Corporation,  in various  positions  including  director  of
marketing  research,  director of sales,  vice president and general  manager of
Syntex Medical  Diagnostics.  Mr. Casey began his career in pharmaceuticals as a
sales  representative  for Eli Lilly and Company.  From 1968 to 1970,  Mr. Casey
served in the U.S.  Peace Corps in  Ethiopia.  Mr. Casey serves on the boards of
Guilford  Pharmaceuticals  Inc., an affiliated  publicly-held  development-stage
neuroscience   company   located  in  Baltimore,   Maryland;   VIVUS,   Inc.,  a
publicly-held  medical devices company  located in Menlo Park,  California;  and
Karo Bio AB, an affiliated privately-held Swedish biotechnology company.

    Dr.  Rosenkranz  joined Scios in July 1996 as Executive  Vice  President and
Chief Operating Officer.  Prior to joining Scios, he was with Roche Laboratories
where he was  Director  of Business  Operations,  ethical  pharmaceuticals,  for
Northern California and Nevada.  Previously, he was with Syntex Laboratories for
12 years and held the  positions of Director of Managed Care Sales,  Director of
Business  and  Commercial  Development,  Director of  Marketing  and Sales Force
Strategy, Director of New Product Development, and Head of Institutes Operations
and Renovascular  Pharmacology for Syntex Research.  A doctoral  graduate of the
University of California, Davis, Dr. Rosenkranz received a Ph.D. in pharmacology
and toxicology with an emphasis in neuropharmacology.  He also holds an MBA from
Santa Clara University and an  undergraduate  degree in psychology from Stanford
University.   Dr.   Rosenkranz   is  the  author  of  more  than  70  scientific
publications,  the holder of six scientific  patents and a member of a number of
professional scientific and business associations.

    Dr.  Grossbard  joined  Scios  in 1991  as Vice  President  of  Medical  and
Regulatory  Affairs and became Senior Vice President in 1996.  Immediately prior
to joining Scios,  he was Vice President of Medical Affairs for  HemaGen/PFC,  a
privately-held company developing  perfluorocarbon products for oxygen transport
and as blood substitutes. From 1982 to 1990, he was Associate Director and later
Director  of  Clinical  Research  for  Genentech,  in  charge  of  the  clinical
development  of Alteplase  (TPA).  From 1978 to 1980, as an Assistant  Attending
Physician at Memorial  Hospital and  Assistant  Professor of Medicine at Cornell
Medical  School,  he helped to establish the Bone Marrow  Transplant  Service at
Memorial Hospital.  He received his M.D. from the Columbia College of Physicians
and  Surgeons in 1973,  trained in internal  medicine at  Massachusetts  General
Hospital  in Boston and  received  subspecialty  training in  hematology  at the
Columbia-Presbyterian  Medical  Center and the Memorial  Sloan-Kettering  Cancer
Center in New York.

    Mr.  Feldman  joined Scios in January 1995 as Vice  President of  Commercial
Operations.  Prior to joining the Company, Mr. Feldman was responsible for sales
and marketing activities in two pharmaceutical companies affiliated with Johnson
& Johnson.  From 1993 through 1994,  Mr.  Feldman was National  Sales Manager at
Ortho  Pharmaceutical  Corporation.  From 1973 to 1993, Mr. Feldman held various
sales and marketing positions at McNeil  Pharmaceutical,  where he most recently
served as National Sales Manager from 1990 to 1993.

    Dr. Lewicki joined Scios in 1983 as a Scientist, and became Senior Scientist
in 1984,  Vice  President,  Research in August 1986,  Vice  President and Deputy
Director, Research in March 1987, and Vice President and Director of Research in
February 1988. Dr. Lewicki  received his Ph.D. in  Physiology/Pharmacology  from
the University of California,  San Diego in 1979. From 1979 to 1981, Dr. Lewicki
conducted  postdoctoral  research at the  University of Virginia,  Department of
Internal Medicine,  and, from 1981 to 1983, he was a research  pharmacologist at
Stanford University, Division of Clinical Pharmacology.

     Mr.  Newman  joined Scios in 1983 as Vice  President,  General  Counsel and
Secretary, and became Vice President of Commercial Development,  General Counsel
and  Secretary in December  1989 and Vice  President of Legal  Affairs,  General
Counsel and Secretary in March 1992.  Prior to joining Scios,  Mr. Newman was an
attorney in private practice.

     Dr.  Ramel  joined the  Company in July 1993 as Vice  President  of Product
Development.  Prior to joining Scios, Dr. Ramel spent eleven years at Genentech,
most recently as Senior Director of Process  Sciences,  which consisted of three
departments: Cell Culture and Fermentation, Product Recovery, and Pharmaceutical
R&D.  Prior to joining  Genentech,  he was Director of the  Biopolymer  Research
Department  at  Hoffmann-La  Roche  Inc.  He  held  academic  positions  at  the
University of Basel, Switzerland,  SUNY at Buffalo and Boston University Medical
School,  and was a postdoctoral  fellow at UC Berkeley's  Biochemistry and Virus
Laboratory.  In addition,  he was an NIH fellow for two years. Dr. Ramel holds a
Ph.D. in Physical Chemistry from the University of Basel. He serves on the board
of Sepragen Corporation, a publicly-held manufacturer of bioprocessing equipment
used in the production of biopharmaceuticals.


                                       18
<PAGE>

                                    PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

    The  Company's  Common  Stock and Class D Warrants  are traded on the Nasdaq
National  Market  System  under the symbols  SCIO and SCIOZ,  respectively.  The
tables  below set forth the high and low sales  prices as reported by Nasdaq for
the  Common  Stock and the Class D Warrants  during  the last two fiscal  years.
Prices represent quotations among dealers without adjustment for retail markups,
markdowns or commissions,  and may not represent  actual  transactions.  No cash
dividends  have been paid on Common Stock,  and the Company does not  anticipate
paying cash dividends in the foreseeable  future. As of December 31, 1996, there
were approximately 6,382 stockholders of record of the Company's Common Stock.

<TABLE>
<CAPTION>

                                        Common Stock
                                        ------------

                       FY 1996                            FY 1995
                       -------                            -------
<S>               <C>          <C>                   <C>          <C>    

                  High         Low                   High         Low
                  ----         ---                   ----         ---

Q1                5-11/16      4-1/16                8-3/4        6-5/8
Q2                8-3/16       4-1/16                7-5/8        2-7/8
Q3                7-3/16       5                     4-7/8        3-11/16
Q4                7-1/8        4-5/8                 4-9/16       3-1/4
Year              8-3/16       4-1/16                8-3/4        2-7/8
</TABLE>

<TABLE>
<CAPTION>

                                  Class D Warrants
                                  ----------------

                     FY 1996                            FY 1995
                     -------                            -------
<S>                <C>         <C>                   <C>         <C>    

                  High         Low                   High        Low
                  ----         ---                   ----        ---

Q1                1-3/16       1/2                   2-7/16      1-3/4
Q2                1-1/4        13/32                 2           21/32
Q3                7/8          3/8                   1           11/16
Q4                3/4          3/8                   15/16       9/16
Year              1-1/4        3/8                   2-7/16      9/16

</TABLE>


                                       19
<PAGE>


Item 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

(Dollars in thousands, except per share amounts)
<S>                           <C>               <C>              <C>               <C>               <C>  

Year Ended December 31,       1996              1995             1994              1993              1992*
-----------------------       ----              ----             ----              ----              -----

Revenues                      $ 64,223          $ 49,187         $ 53,667          $ 47,568          $ 25,085
Loss from operations           (22,053)          (28,175)         (31,719)          (43,237)         (138,703)
Other income                     4,497             5,049            4,045             6,298             7,338
Net loss                       (18,403)          (26,382)         (27,961)          (36,579)         (131,946)
Net loss per common share        (0.51)            (0.74)           (0.79)            (1.05)            (5.76)
Cash and securities             62,170            87,069          104,439           108,271           134,660
Working capital                 (5,838)           11,642           38,942            96,334            42,842
Total assets                   113,961           131,550          146,096           151,278           182,398
Long-term obligations              426             1,082            1,739             2,323               401
Stockholders' equity            93,628           109,394          126,438           135,299           169,144
Employees at year end              335               301              283               337               382
-------------------
<FN>

*  Includes  Nova   Pharmaceutical   Corporation  and  Nova  Technology  Limited
Partnership from the dates of their acquisition,  September 3, 1992 and December
31, 1992,  respectively,  as well as related charges for in-process technologies
totaling $108.0 million.
</FN>
</TABLE>




Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The following discussion contains  forward-looking  statements about plans,
objectives,  future results and intentions of Scios Inc. (the "Company").  These
forward-looking statements are based on the current expectations of the Company,
and the Company assumes no obligation to update this information. Realization of
these plans and results  involves  risks and  uncertainties,  and the  Company's
actual results could differ  materially from those discussed here.  Factors that
could cause or contribute to such differences  include,  but are not limited to,
those  discussed  below,  as well as in other  sections of this Annual Report on
Form 10-K for the year ended December 31, 1996.

Operating Results (1996, 1995 and 1994)

     Total revenues for Scios were $64.2 million in 1996,  $49.2 million in 1995
and $53.7  million in 1994.  The revenue  increase  from 1995 to 1996 was due to
higher research and development contract revenues and co-promotion  commissions.
The revenue  decline  from 1994 to 1995 was the result of lower  product  sales,
co-promotion commissions and research and development contract revenues.

     Revenue from product sales of certain psychiatric  products ("SB Products")
under license from  SmithKline  Beecham  Corporation  ("SB") was $38.2  million,
$41.4 million and $42.8 million in 1996,  1995 and 1994,  respectively.  Product
sales  declined 8% from 1995 to 1996 and 3% from 1994 to 1995 due to competition
from generic drugs.

                                       20
<PAGE>

     Co-promotion  commissions were $6.5 million, $2.3 million, and $3.8 million
in  1996,  1995  and  1994,  respectively.  The  Company  receives  co-promotion
commissions under agreements with Ortho-McNeil Pharmaceutical  ("Ortho-McNeil"),
an  affiliate  of  Johnson & Johnson,  for the  co-promotion  of  Ortho-McNeil's
psychiatric  product HALDOL(R)  Decanoate,  and with  Wyeth-Ayerst  Laboratories
("Wyeth-Ayerst"),  a division of American  Home  Products  Corporation,  for the
co-promotion of Wyeth-Ayerst's psychiatric product EFFEXOR(R) (venlafaxine HCl).
Co-promotion revenue under both agreements is based on achieving aggregate sales
levels  over  contract  years,  which  do  not  coincide  with  calendar  years.
Consequently,  annual revenue  recognition  is based,  in part, on the Company's
forecast of sales for the respective  contract years.  Co-promotion  commissions
increased  from  1995 to 1996 as a  result  of  increasing  sales  of  HALDOL(R)
Decanoate and from revenue recognized for seven months of contract year sales of
EFFEXOR(R) (venlafaxine HC1) under the new agreement with Wyeth-Ayerst completed
in June of 1996.  Commissions declined from 1994 to 1995 because actual sales of
HALDOL(R)  Decanoate  for the  contract  year ended July 1995 were less than the
Company's forecast at December 31, 1994.

     Revenue from research and development  contracts was $19.5 million in 1996,
$5.5  million in 1995 and $7.1 million in 1994.  The increase  from 1995 to 1996
was principally due to receipt of $12.0 million from  Wyeth-Ayerst upon entering
into a  collaboration  agreement for the development  and  commercialization  of
FIBLAST(R)   trafermin   ("FIBLAST")  for  the  treatment  of  neurological  and
cardiovascular  disorders and $2.0 million received under other agreements.  The
decrease from 1994 to 1995 was due primarily to a milestone  payment from Pfizer
Inc and a final  payment  under an agreement  with E. Merck,  both of which were
received in 1994. In 1996,  the payment from  Wyeth-Ayerst  accounted for 62% of
total research and development contract revenue.  Revenues under a collaboration
with Hoechst Marion Roussel to study Alzheimer's disease comprised approximately
8%, 32% and 26% of contract revenue in 1996, 1995 and 1994, respectively,  while
revenues under the collaboration with Kaken  Pharmaceutical  Co., Ltd. ("Kaken")
to develop FIBLAST in Japan for the treatment of dermal ulcers, were 9%, 30% and
31% of contract revenue in 1996, 1995 and 1994, respectively.

     Cost of goods sold for the SB Products was $22.3 million, $24.7 million and
$26.5 million in 1996,  1995 and 1994,  respectively.  The declines from year to
year were principally the result of lower unit sales.  Gross margins improved to
42% in 1996 from 40% in 1995 and 38% in 1994 due to a sales  mix  shift  towards
higher  margin  products and annual  price  increases.  Future  changes in gross
margins  will be  principally  dependent  upon the  effects of price  increases,
competition in the marketplace and changes in the product mix.

     Research and development expenses were $39.4 million in 1996, $29.3 million
in 1995 and $34.5 million in 1994. The increase from 1995 to 1996 was the result
of higher  staffing  levels and greater  expenses for  clinical  trials and drug
supply to support  further  development  of the  Company's  lead  products.  The
decline  from 1994 to 1995  reflects the  September  1994  consolidation  of the
Company's  Baltimore,  Maryland  research and  development  operations  with the
Company's operations in California.

     Marketing,  general and administrative expenses were $19.8 million in 1996,
$18.2  million in 1995,  and $15.7 million in 1994.  The spending  increase from
1995 to 1996  was  principally  due to  higher  depreciation.  The  increase  in
spending  from  1994 to 1995 was  primarily  the  result  of  higher  sales  and
marketing  expenses and spending to support  expanded  business  development and
computer automation activities.

     The profit distribution to third parties of $4.8 million,  $5.1 million and
$5.2 million in 1996, 1995 and 1994, respectively,  represents SB's share of the
net profits  from sales of the SB Products.  The decrease  from 1995 to 1996 was
principally  due to declining  product sales while the 1994 to 1995 decrease was
due to higher sales and marketing expenses attributable to SB Product sales.

     The restructuring charge of $3.5 million recorded in 1994 was the result of
the  Company's  closure of its research and  development  facility in Baltimore,
Maryland.

     Other  income  was $4.5  million  in 1996,  $5.0  million  in 1995 and $4.0
million  in 1994.  The  decrease  from 1995 to 1996 was due to lower  investment
income from the Company's  invested portfolio and higher royalty expenses offset
in part by gains on the sale of 200,000 shares of Guilford  Pharmaceuticals Inc.
("Guilford") stock and other marketable  securities in the Company's  investment
portfolio.  The  1995  increase  over  1994  was due to a net  gain on  sales of
securities  in 1995  versus  a net  loss on  sales  of  securities  in 1994  and
increased  interest earnings resulting from higher average interest rates on the
invested portfolio.

                                       21
<PAGE>

     The $0.3  million  gain in  equity in  affiliate  in 1996  versus  the $3.3
million loss in 1995,  was the result of  profitable  operations  of Guilford in
1996 versus  unprofitable  operations in 1995. The increase in loss of affiliate
from  $0.9  million  in 1994 to $3.3  million  in 1995 was the  result of higher
Guilford  losses in 1995.  The  Company's  percent  ownership  in  Guilford  has
declined  from  62% in May  1994 to 10% at  December  31,  1996 as a  result  of
Guilford's  public  stock  offerings  and the recent sale of  Guilford  stock by
Scios.  Since Guilford's initial public stock offering in June 1994, the Company
has used the equity method of accounting for its investment. Prior to the public
stock offering,  the financial  results of Guilford were consolidated with those
of the  Company.  The  minority  interest of $0.6  million in 1994  reflects the
minority  shareholders'  portion of  Guilford's  losses when  Guilford was fully
consolidated.  The minority  interest of $(1.1)  million in 1996 is the share of
Biotechnology   Research  Partners  net  income  attributable  to  the  minority
partners.

Outlook and Risks

     The Company is striving to achieve profitability in the next several years.
The ability of the Company to achieve  profitability  depends  principally upon:
(i) the safety and  efficacy  of the  Company's  products,  the  progress of its
product  development  efforts,  its  success in  enrolling  patients in clinical
trials and the  timing  and scope of  regulatory  approvals,  particularly  with
respect to the Company's  lead products  AURICULIN(R)  anaritide  ("AURICULIN"),
NATRECOR(R)  BNP,  and  FIBLAST,  and the degree of market  acceptance  of these
products  if  approved  for  sale;  (ii) the  Company's  success  in  generating
operating  profits  from  marketing  and  selling  the  SB  Products,  HALDOL(R)
Decanoate,  EFFEXOR(R)  (venlafaxine  HCl) and  additional  third-party  product
rights which it may acquire,  the  Company's  ability to establish  and maintain
profitable  arrangements under which to represent the products of third parties,
the impact of competing  products and the Company's  ability to forecast  future
trends affecting the timing of revenue recognition such as the level of Medicaid
rebates  and  rate of sales  growth  over a  particular  period  and  continuing
availability  of these products from its partners;  and (iii) the development of
new  third-party  funding  sources  and other  revenues  to  support  continuing
research and development  programs and the results  realized by third parties on
whom the  Company  may rely to sell its  products,  particularly  outside of the
United States.  Profitability  will also be affected by the Company's ability to
undertake  complex  manufacturing  processes  in  a  cost-effective  manner,  to
scale-up and then  manufacture  products the Company expects to market directly,
and any products  manufactured  for third  parties.  With limited  manufacturing
resources  of its own,  the Company  has entered  into  contracts  with,  and is
dependent upon,  third-party suppliers for the manufacture of its lead products.
Although the Company does not currently foresee a supply problem, future product
supply and the  Company's  profitability  could be  affected  by events at these
suppliers over which the Company has limited control.

    Further  development  of the  Company's  products  will require  substantial
additional  investment  to cover,  among  other  things,  the costs of  clinical
trials,  the  securing  of  commercial-scale  manufacturing  capability  and the
marketing and sales expenses associated with product  introductions and start-up
costs.  While  market  introduction  of new products  will require  considerable
expenditures  by the Company,  revenues  generated from such products,  assuming
they  are  successfully  developed,  may  not be  realized  for  several  years.
Principal  factors  that could  affect the level of new  product  revenues  will
include  the  rate  of  market  penetration,  the  availability  of  alternative
therapies,  the price charged by the Company per course of therapy,  the breadth
of the approved indication allowed by the Food and Drug Administration and what,
if any, income can be obtained from potential third-party licensees. In the case
of AURICULIN,  the Company alone is responsible for continued  development costs
in the United  States and Canada  through  United  States  regulatory  approval.
Genentech Inc. ("Genentech") is responsible for development costs in the rest of
the world.  Following  its decision to cease  marketing of products  outside the
United  States  and Canada  using its own  salesforce,  Genentech  is seeking to
sublicense its rights to market AURICULIN  outside the United States and Canada.
Marketing  costs  and  marketing  profits  will be  shared  by the  Company  and
Genentech  in the United  States and  Canada.  Genentech  will pay the Company a
royalty  on  sales  in  other  countries.  In the  case  of  FIBLAST  for use in
neurological and  cardiovascular  disorders,  development and  commercialization
expenses and any subsequent revenues will be shared with Wyeth-Ayerst at varying
percentages. In the case of NATRECOR, the Company has not yet elected to partner
the therapeutic  applications,  although it plans to do so, at least for markets
outside of North America.

                                       22
<PAGE>

     Sales of the SB  Products,  in total,  are  likely to  continue  to decline
during  the next few  years  because  of  continuing  competition  from  generic
products.  The Company hopes to more than offset any such decrease with payments
received for the co-promotion of HALDOL(R)  Decanoate,  EFFEXOR(R)  (venlafaxine
HCl),  and revenues from the promotion of any additional  third-party  products.
Factors  influencing  the  availability  of such  additional  products  on terms
favorable  to the Company  include  the  ability of the  Company to  demonstrate
success under its current  agreements and the  willingness of other companies to
enter into such agreements.

     A portion of the  Company's  revenues  will  continue  to be  derived  from
collaborative research agreements.  Future collaborative funding will depend, in
part,  upon  priorities  set by the sponsors in relation to the sponsors'  other
product   opportunities  and  their  assessment  of  the  continued  benefit  of
sponsoring a particular program at the Company. Other licenses and agreements to
manufacture  and supply bulk  materials are also subject to  termination  by the
licensee or contract sponsor under certain circumstances.

     For the reasons  stated  above,  the  operating  results of the Company are
expected to fluctuate from period to period. Inflation is not expected to have a
significant  effect upon the business of the Company.  In addition,  because the
Company  participates in a highly dynamic  industry,  the Company's common stock
price is subject to significant  volatility as a result of  developments at both
the Company and in the biopharmaceutical industry in general.

Liquidity and Capital Resources

     Combined  cash,  cash   equivalents   and  securities   (both  current  and
non-current)  totaled  $62.2  million at December  31, 1996, a decrease of $24.9
million from December 31, 1995.  The decrease was mainly  attributable  to $19.1
million used to fund operations, $6.7 million of spending on property, plant and
equipment  and $2.0 million used for the  purchase of treasury  stock  partially
offset  by $3.6  million  from  the  sale of  Guilford  stock.  Working  capital
decreased  from $11.6 million at December 31, 1995 to $(5.8) million at December
31, 1996. The decrease  resulted  principally  from a reduction in the amount of
marketable securities classified as current assets.

     In November  1995,  the Company  announced  that its board of directors had
authorized the expenditure of up to $6.0 million for the repurchase of shares of
the Company's  common stock.  As of December 31, 1996, the Company had purchased
677,000 shares at an aggregate price of $3.0 million under this program.

     To date,  the  Company's  operations  and  capital  requirements  have been
financed  primarily  from the  proceeds  of public and  private  sales of common
stock,  research and  development  partnerships,  collaborative  agreements with
pharmaceutical  firms,  product sales and investment  income.  The Company's net
operating losses and credit  carryforwards  will provide an additional source of
liquidity  only to the extent that  profitable  operations are achieved prior to
the expiration of  carryforward  periods.  The  utilization of losses  generated
through the date of the 1992 merger with Nova Pharmaceutical Corporation will be
subject to annual limitations.

Outlook and Risks

     The  Company's  cash,  cash   equivalents  and  marketable   securities  of
approximately  $62.2  million at December 31, 1996,  together with revenues from
product sales,  collaborative  agreements and interest  income,  will be used to
fund new and continuing  research and development  programs,  expanded  clinical
trials for its products under  development  and for other general  purposes.  In
addition to its cash and marketable  securities  balances,  the Company may also
fund  operations  through  borrowing under its $30.0 million line of credit from
Genentech  or by the sale of all,  or a  portion,  of its equity  investment  in
Guilford.  The Company also has a $12.0 million line of credit from Wyeth-Ayerst
available to expand its manufacturing facility for FIBLAST. The Company believes
its cash  resources  and lines of credit will be  sufficient to meet its capital
requirements  for the next several  years.  Key factors which will affect future
cash use and the  timing  of the  Company's  need to seek  additional  financing
include  the  results of the  Company's  partnering  efforts  and the timing and
amounts realized from licensing and partnering activities,  the rate of spending
required  to develop the  Company's  products  and respond to changing  business
conditions  and the  net  contribution  produced  by the  Commercial  Operations
Division from  co-promoting and marketing  current and future products for third
parties.

                                       23
<PAGE>

     Over the long term,  the Company may need to arrange  additional  financing
for the future operation of its business, including the commercialization of its
products   currently  under   development,   and  will  consider   collaborative
arrangements and additional public or private financings,  including  additional
equity  financings.  Factors  influencing the availability of additional funding
include the Company's progress in product  development,  investor  perception of
the Company's prospects and the general conditions of the financial markets.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See  Index  to  Financial   Statements  and  Schedules appearing on page 
F-1 of this Form 10-K.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE

    None.



                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Identification  of Directors.  The  information  required by Item 10 of Form
10-K with respect to identification of directors is incorporated by reference to
the information  contained in the section  captioned  "Election of Directors" of
the  Company's  definitive  Proxy  Statement  for the  1997  Annual  Meeting  of
Stockholders.

    Identification of Executive Officers. See pages 17 and 18 of this Form 10-K.

Item 11. EXECUTIVE COMPENSATION

    The  information  required  by  Item  11 of Form  10-K  is  incorporated  by
reference to the  information  contained in the  sections  captioned  "Executive
Compensation"   and  "Stock  Option  Grants  and  Exercises"  of  the  Company's
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The  information  required  by Item 12 of Form  10-K is  incorporated  by
reference  to the  information  contained  in the  section  captioned  "Security
Ownership of Management and Principal  Stockholders" of the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Stockholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       The  information  required  by Item 13 of Form  10-K is  incorporated  by
reference  to the  information  contained  in  the  section  captioned  "Certain
Relationships and Transactions" of the Company's  definitive Proxy Statement for
the 1997 Annual Meeting of the Stockholders.

                                       24
<PAGE>


                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

       (a) (1) Financial  Statements.  See Index to  Financial  Statements  and
Schedules at page F-1 of this Form 10-K.

           (2) Financial Statement Schedules. See Index to Financial Statements 
               and Schedules at page F-1 of this Form 10-K.

           (3) Exhibits.  See Exhibit Index at page 25 of this Form 10-K.

       (b) Reports on Form 8-K.  There were no reports on Form 8-K filed in the
last quarter of 1996.



<TABLE>
<CAPTION>
                                                      EXHIBIT INDEX
       Exhibit
       Number                                                                                                         Page
       <S>        <C>                                                                                                 <C>    

       3.1        Certificate of Incorporation...........................................................................R

       3.2        Bylaws.................................................................................................J

       10.1       Biotechnology Research Partners, Ltd. Agreement of Limited Partnership
                  dated October 29, 1982; Development Contract, Technology License Agreement
                  and Joint Venture Agreement between Biotechnology Research Partners, Ltd. and
                  the Registrant dated December 29, 1982; Promissory Note dated December 29, 1982;
                  and Memorandum of Understanding between Battery Park Credit Company and
                  Biotechnology Research Partners, Ltd. dated December 28, 1982..........................................A

       10.2       1983 Incentive Stock Option Plan, as amended, and form of Stock Option
                  Agreement, Promissory Note and Pledge Agreement........................................................E

       10.3       Common Stock Purchase Agreement dated April 15, 1985 between the Registrant
                  and American Home Products Corporation.................................................................B

       10.4       Agreement of Purchase and Sale (Real Estate) and Joint Escrow Instructions
                  by and between Charleston Properties and Bio-Shore Holdings, Ltd.
                  dated December 30, 1986................................................................................C

       10.5       1986 Supplemental Stock Option Plan, as amended, and form of Stock Option
                  Agreement, Promissory Note and Pledge Agreement........................................................E

       10.6       Rights Exercise Agreement between the Registrant and American Home Products
                  Corporation dated February 28, 1986 and Letter of March 26 and May 16, 1986............................B

       10.8       Employment Letter dated November 11, 1987 between the Registrant and
                  Richard L. Casey.......................................................................................D

                                       25
<PAGE>

       10.9       Rights Agreement dated as of June 18, 1990 between the Registrant and
                  The First National Bank of Boston......................................................................F

       10.11      1992 Equity Incentive Plan.............................................................................H

       10.12      Agreement and Plan of Reorganization by and among the Registrant, Nova
                  Pharmaceutical Corporation and DD Acquisition Subsidiary, Inc. dated as of May 12,
                  1992, as amended, July 17, 1992........................................................................J

       10.13      Form of Technology Transfer Agreement between Nova Technology Limited
                  Partnership, Nova and Nova Technology Corporation......................................................I

       10.14      Form of Manufacturing and Marketing Agreement between Nova Technology
                  Limited Partnership and Nova...........................................................................I

       10.15      Amended and Restated Agreement of Limited Partnership of Nova Technology
                  Limited Partnership....................................................................................I

       10.16      Form of Research Agreement between Nova Technology Limited Partnership and Nova........................I

       10.17      Form of Guaranty given by Nova to Nova Technology Limited Partnership
                  and its limited partners...............................................................................I

       10.18      Form of Purchase Option Agreement between each of the limited partners of
                  Nova Technology Limited Partnership and Nova...........................................................I

       10.19      Nonemployee Director Stock Option Plan.................................................................G

       10.20      Warrant Agreement dated December 1, 1987 between the Registrant and
                  IBJ Schroder Bank & Trust Company......................................................................K

       10.27      Purchase Agreement dated as of July 29, 1988 between Nova and SKB Properties, Ltd......................M

       10.29      CNS Psychiatric Products Agreement dated June 30, 1990 between SmithKline
                  Beecham Corporation and Nova...........................................................................N

       10.30      Master Security Agreement, Promissory Note and Negative Covenant Agreement,
                  each dated April 28, 1993, between the Registrant and General Electric
                  Capital Corporation....................................................................................O

       10.31      Master Lease Agreement dated July 16, 1993 between the Registrant and General
                  Electric Capital Corporation...........................................................................O

       10.32      Collaboration Agreement dated December 30, 1994 between the Registrant and
                  Genentech, Inc.........................................................................................Q

       10.33      Preferred Stock Purchase Agreement dated December 30, 1994 between the
                  Registrant and Genentech, Inc..........................................................................Q

       10.34      Note Agreement dated December 30, 1994 between the Registrant and Genentech, Inc.......................Q

                                       26
<PAGE>

       10.35      Assignment of Lease dated March 22, 1995 for premises located at 820 West Maude
                  Avenue, Sunnyvale, California..........................................................................R

       10.36      Special Warranty Deed of Improvements dated February 24, 1995 from Rouse-Teachers
                  Properties, Inc. ("ARTP") to the Registrant and Assignment of Ground Lease dated
                  February 22, 1995 from RTP to the Registrant...........................................................R

       10.37      Lease Agreement dated January 20, 1995 between the Registrant and PDL-RTKL
                  Associates, a Maryland General Partnership.............................................................R

       11.1       Computation of Loss per Share..............................................Filed electronically herewith

       21.1       Subsidiaries of Registrant.................................................Filed electronically herewith

       23.1       Consent of Coopers & Lybrand...............................................Filed electronically herewith

       24.1       Powers of Attorney.  Reference is made to page 29.
-------------------
<FN>

A      Filed  as an  exhibit  to  Form  S-1  Registration  Statement  (File  No.
       2-86086), as amended, and incorporated herein by reference.

B      Filed  as an  exhibit  to  Form  S-1  Registration  Statement  (File  No.
       33-3186), as amended, and incorporated herein by reference.

C      Filed as an  exhibit to Annual  Report on Form 10-K for fiscal  year 1986
       and incorporated herein by reference.

D      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1987 
       and incorporated herein by reference.

E      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988
       and incorporated herein by reference.

F      Filed as an exhibit to Form 8-K filed on June 19,  1990 and Form 8-A 
       Registration  Statement filed on June 20, 1990 and incorporated herein 
       by reference.

G      Filed  as an  exhibit  to  Form  S-8  Registration  Statement  (File  No.
       33-39878) filed on April 8, 1991 and incorporated herein by reference.

H      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991 
       and incorporated herein by reference.

I      Filed  as an  exhibit  to  Form  S-1  Registration  Statement  (File  No.
       33-14937)  filed on behalf of Nova  Technology  Limited  Partnership  and
       incorporated herein by reference.

J      Filed  as an  exhibit  to  Form  S-4  Registration  Statement  (File  No.
       33-49846) filed on July 22, 1992 and incorporated herein by reference.

K      Filed as an exhibit to Form S-3  Registration  Statement of Nova (File 
       No. 33-14938)  and  incorporated  herein by reference.

L      Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year  
       1985 and  incorporated  herein by reference.

                                       27
<PAGE>

M      Filed as an exhibit to Nova's Report on Form 8-K dated July 29, 1988 and
       incorporated herein by reference.

N      Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
       1990 and  incorporated  herein by reference.

O      Filed as an exhibit to Quarterly  Report on Form 10-Q for the quarter 
       ended June 30, 1993 and incorporated herein by reference.

P      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1992 
       and incorporated herein by reference.

Q      Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994 
       and incorporated herein by reference.

R      Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter 
       ended March 31, 1995 and incorporated herein by reference.
</FN>
</TABLE>


                                       28
<PAGE>



                                   SIGNATURES

             Pursuant  to  the  requirements  of  Section  13 or  15(d)  of  the
  Securities Exchange Act of 1934, the registrant has duly caused this report to
  be signed on its behalf by the undersigned, thereunto duly authorized.

                                      SCIOS INC.

Date:  March 28, 1997                 By:  /s/ Richard L. Casey
                                           Richard L. Casey
                                           Chairman of the Board, President and
                                           Chief Executive Officer

                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes and appoints  Richard L. Casey his  attorney-in-fact,
with the power of substitution,  for him in any and all capacities,  to sign any
amendments  to this  Report on Form 10-K,  and to file the same,  with  exhibits
thereto and other  documents in connection  therewith,  with the  Securities and
Exchange  Commission,   hereby  ratifying  and  confirming  all  that  the  said
attorney-in-fact,  or his substitute or substitutes,  may do or cause to be done
by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature                   Title                                Date
---------                   -----                                ----


/s/ Richard L. Casey        Chairman of the Board,               March 28, 1997
Richard L. Casey            President and Chief 
                            Executive Officer 
                            (Principal Executive Officer)


/s/ Kevin J. McPherson      Director of Finance                  March 28, 1997
Kevin J. McPherson          (Principal Accounting Officer)


/s/ Samuel H. Armacost      Director                             March 28, 1997
Samuel H. Armacost

/s/ Myron Du Bain           Director                             March 28, 1997
Myron Du Bain

/s/ Robert W. Schrier       Director                             March 28, 1997
Robert W. Schrier

/s/ Burton E. Sobel         Director                             March 28, 1997
Burton E. Sobel

/s/ Solomon H. Snyder       Director                             March 28, 1997
Solomon H. Snyder

/s/ Eugene L. Step          Director                             March 28, 1997
Eugene L. Step





                                       29
<PAGE>




                       FINANCIAL STATEMENTS AND SCHEDULES
                                                                         Page

  Report of Independent Accountants......................................F-2

  Consolidated Balance Sheets at December 31, 1996 and
   December 31, 1995 ....................................................F-3

  Consolidated Statements of Operations for the years ended
   December 31, 1996, 1995 and 1994......................................F-4

  Consolidated Statements of Cash Flows for the years ended
   December 31, 1996, 1995 and 1994......................................F-5

  Consolidated Statements of Stockholders' Equity for the
   years ended December 31, 1996, 1995 and 1994 .........................F-6

  Notes to Consolidated Financial Statements ............................F-7

  Financial Statement Schedules
  (Omitted because they are not required, are not applicable, or the information
  is included in the consolidated financial statements or notes thereto.)

                                       F-1

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



        To the Board of Directors and Stockholders
        Scios Inc.:

        We have audited the  accompanying  consolidated  balance sheets of Scios
        Inc. and  subsidiaries as of December 31, 1996 and 1995, and the related
        consolidated  statements of  operations,  stockholders'  equity and cash
        flows for each of the three years in the period ended December 31, 1996.
        These  financial  statements  are the  responsibility  of the  Company's
        management.  Our  responsibility  is to  express  an  opinion  on  these
        financial statements based on our audits.

        We conducted our audits in accordance with generally  accepted  auditing
        standards.  Those standards  require that we plan and perform the audits
        to obtain  reasonable  assurance about whether the financial  statements
        are free of material  misstatement.  An audit includes  examining,  on a
        test basis,  evidence  supporting  the amounts  and  disclosures  in the
        financial  statements.  An audit also includes  assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our audits provide a reasonable basis for our opinion.

        In our  opinion,  the  financial  statements  referred to above  present
        fairly, in all material respects, the consolidated financial position of
        Scios Inc. and  subsidiaries  as of December 31, 1996 and 1995,  and the
        consolidated  results of their  operations and their cash flows for each
        of the three years in the period ended  December 31, 1996, in conformity
        with generally accepted accounting principles.




        Coopers & Lybrand L.L.P.
        San Jose, California
        January 29, 1997


                                      F-2


<PAGE>
                                  SCIOS INC.
                              AND SUBSIDIARIES
<TABLE>
<CAPTION>
                           Consolidated Balance Sheets
                        (In thousands, except share data)
   

ASSETS                                                                             December 31,
<S>                                                                       <C>                   <C>   
                                                                          1996                  1995
                                                                          ------------          -----------
Current assets:
     Cash and cash equivalents                                                 $1,587               $2,847
     Marketable securities                                                      6,888               25,986
     Accounts receivable                                                        4,808                3,014
     Prepaid expenses                                                             786                  869
                                                                              -------              -------
                                                                          
       Total current assets                                                    14,069               32,716

Marketable securities, non-current                                             53,695               58,236
Investment in affiliate                                                         6,939                2,937
Property and equipment, net                                                    36,839               35,531
Other assets                                                                    2,419                2,130
                                                                                -----                -----
                                                                          
TOTAL ASSETS                                                                 $113,961             $131,550
                                                                             ========             ========
                                                                          

     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable to banks                                                    $3,000               $3,000
     Accounts payable                                                           2,507                3,778
     Other accrued liabilities                                                 10,011                7,863
     Deferred contract revenue                                                  3,666                5,775
     Current portion of long-term debt and capital leases                         723                  658
                                                                              -------              -------
       Total current liabilities                                               19,907               21,074

Long-term debt and capital leases                                                 349                1,082
Minority interests                                                                 77                   --
Commitments (Notes 9, 10 and 11)

Stockholders' equity:
     Preferred stock; $.001 par value; 20,000,000 shares authorized;  
        issued and outstanding: 12,632 and 16,053, respectively 
       (liquidation preference of $12,000 and $15,250, respectively)               --                   --
     Common stock; $.001 par value;  150,000,000  shares authorized;  
        issued and outstanding: 36,506,297 and 36,009,055, respectively            37                   36
     Additional paid-in capital                                               404,456              399,155
     Treasury stock                                                            (2,991)                (967)
     Notes receivable from stockholders                                           (13)                 (20)
     Unrealized gains (losses) on securities                                      (70)                 578
     Accumulated deficit                                                     (307,791)            (289,388)
                                                                             --------             -------- 
                                                                          
       Total stockholders' equity                                              93,628              109,394
                                                                               ------              -------
                                                                          

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $113,961             $131,550
                                                                             ========             ========
                                                                          
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      F-3
<PAGE>


                                   SCIOS INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                            -----------------------
                                                                 1996                 1995                1994
                                                                 ----                 ----                ----

<S>                                                              <C>                  <C>                 <C>
Revenues:
    Product sales                                                $38,189              $41,396             $42,792
    Co-promotion commissions                                       6,503                2,331               3,770
    Research & development contracts                              19,531                5,460               7,105
                                                                  ------                -----               -----
                                                                  64,223               49,187              53,667
                                                                  ------               ------              ------
                                                                  

Costs and expenses:
    Cost of goods sold                                            22,313               24,742              26,541
    Research and development                                      39,424               29,341              34,491
    Marketing, general and administration                         19,779               18,226              15,681
    Profit distribution to third parties                           4,760                5,053               5,173
    Restructuring charges                                             --                   --               3,500
                                                                  ------                -----               -----
                                                                  86,276               77,362              85,386 
                                                                  ------               ------              ------

Loss from operations                                             (22,053)             (28,175)            (31,719)

Other income:
    Investment income                                              5,942                5,283               4,386
    Other expense                                                 (1,445)                (234)               (341)
                                                                  ------                 ----                ---- 
                                                                   4,497                5,049               4,045

Equity in net income (loss) of affiliate                             274               (3,256)               (883)
Minority interests                                                (1,121)                  --                 596
                                                                  ------                -----               -----
    Net loss                                                    ($18,403)            ($26,382)           ($27,961)
                                                                ========             ========            ======== 

    Net loss per common share                                     ($0.51)              ($0.74)             ($0.79)
                                                                --------             --------            --------
    Weighted average number of
       common shares outstanding                              35,885,922           35,809,876          35,219,442
                                                              ----------           ----------          ----------
                                                             
                                                          
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      F-4
<PAGE>

<TABLE>
<CAPTION>


                                   SCIOS INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                                 (In thousands)
Year Ended December 31,                                              1996            1995             1994
                                                                   ------------     -----------     ------------
<S>                                                                  <C>             <C>              <C>    
Cash flows from operating activities:
   Net loss                                                          $(18,403)       $(26,382)        $(27,961)
   Adjustments to reconcile net loss to net
   cash used by operating activities:
      Depreciation and amortization                                     5,330           3,882            4,693
      Deferred contract revenue                                        (2,109)          3,331            1,827
      (Gain)/loss on sale of assets                                    (2,620)            241               96
      Equity in net (income) loss of affiliate                           (274)          3,256            1,898
      Minority interest in net income                                   1,121              --               --
      Change in assets and liabilities:
        Accounts receivable                                            (1,794)            585             (915)
        Accounts payable                                               (2,315)            477            1,133
        Other accrued liabilities                                       2,148          (1,821)             671
        Other                                                            (206)            (60)            (997)
                                                                      -------         -------          -------
             Net cash used by operating activities                    (19,122)        (16,491)         (19,555)
                                                                      =======         =======          ======= 
                                                                   

Cash flows from investing activities:
   Purchase of affiliates warrants                                         --            (167)              --
   Payments for property and equipment, net                            (6,682)         (5,698)          (3,432)
   Proceeds from sale of investment in affiliate                        3,600              --               --
   Proceeds from sale of assets                                            44             163              157
   Sales/maturities of marketable securities                          219,027         220,754          454,147
   Purchases of marketable securities                                (196,036)       (227,324)        (435,036)
                                                                      -------         -------          -------
             Net cash provided by (used in) investing activities       19,953         (12,272)          15,836
                                                                       ======         =======           ======
               
                                                                  
Cash flows from financing activities:
   Proceeds from issuance of preferred stock                               --              --           20,000
   Issuance of common stock and collection of
       notes receivable from stockholders, net                            601             519              411
   Purchase of treasury stock                                          (2,024)           (967)              --
   Issuance of notes payable                                               --           3,000               --
   Payment of long-term debt                                             (668)           (616)            (605)
                                                                      -------         -------          -------
             Net cash provided by (used in) financing activities       (2,091)          1,936           19,806
                                                                       ======           =====           ======
                                                                   
Net increase (decrease) in cash and cash equivalents                   (1,260)        (26,827)          16,087
Cash and cash equivalents at beginning of period                        2,847          29,674           13,587
                                                                      -------         -------          -------
Cash and cash equivalents at end of period                            $ 1,587         $ 2,847         $ 29,674 
                                                                      =======         =======         ======== 

Supplemental cash flow data:
   Cash paid during the period for interest                              $419            $203             $256
Supplemental disclosure of non-cash investing
   and financing activities:
   Unrealized securities gains (losses)                                  (648)          2,887           (2,309)
   Investment in affiliate                                              4,708           6,026               --
   Incentive plan awards                                                   --            $873             $578
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       F-5
<PAGE>


                                   SCIOS INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity
                        (In thousands, except share data)
<TABLE>
<CAPTION>
                                                                        
                                                                                    Notes         Unrealized
                               Common Stock        Additional  Preferred            Receivable    Gains           
                           --------------------    Paid-In     Stock      Treasury  from          (Losses) on  Accumulated
                           Shares     Par Value    Capital     Par Value  Stock     Stockholders  Securities   Deficit      Total
                           ------     ---------    -------     ---------  -----     ------------  ----------   -------      -----
<S>                        <C>        <C>          <C>         <C>        <C>       <C>           <C>          <C>          <C>
                                   
Balances at 
  December 31, 1993        35,109,937     $35     $370,468     $ --       $ --      ($159)        $ --         ($235,045)  $135,299
                                                                                        
Issued to Genentech Inc.                            20,000                                                                   20,000
Options exercised              71,702                  375                                                                      375
Notes receivable from                                                                 
 stockholders                                                                         132                                       132
Incentive plan awards          65,349                  578                                                                      578
Other                          36,212                  324                                                                      324
Unrealized losses on
 available-for-sale                                                                               
 securities                                                                                       (2,309)                    (2,309)
Net loss                                                                                                         (27,961)   (27,961)

-----------------------------------------------------------------------------------------------------------------------------------
Balances at 
 December 31, 1994         35,283,200     $35     $391,745     $ --      $ --        ($27)       ($2,309)      ($263,006)  $126,438
                                                                      
Conversion of preferred       500,000       1           (1)                                                                       0
Purchase of treasury stock                                                (967)                                                (967)
Options exercised             123,171                  512                                                                      512
Notes receivable from                                                                                                            
 stockholders                                                                           7                                         7
Incentive plan awards         102,684                  873                                                                      873
Unrealized gains on
 available-for-sale                                                                                 
 securities                                                                                        2,887                      2,887
Investment in Guilford                               6,026                                                                    6,026
Net loss                                                                                                         (26,382)   (26,382)
                                                                                                                     
-----------------------------------------------------------------------------------------------------------------------------------
Balances at 
 December 31, 1995         36,009,055     $36     $399,155     $ --       (967)      ($20)          $578       ($289,388)  $109,394
                                                                    
Conversion of preferred       342,100       1           (1)                                                                       0
Purchase of treasury stock                                              (2,024)                                              (2,024)
Options exercised             155,142                  594                                                                      594
Notes receivable from                                                                   
 stockholders                                                                           7                                         7
Unrealized losses on
 available-for-sale                                                                                                      
 securities                                                                                         (648)                      (648)
Investment in Guilford                               4,708                                                                    4,708
Net loss                                                                                                         (18,403)   (18,403)
                                                                                                                        
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
 December 31, 1996         36,506,297     $37     $404,456     $ --    ($2,991)      ($13)          ($70)      ($307,791)   $93,628
                                                                   
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                      F-6

<PAGE>
                                                        

                           SCIOS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 1.       Formation and Business of the Company

          Scios Inc. (the "Company") is a  biopharmaceutical  company engaged in
          the discovery, development, manufacture and commercialization of novel
          human therapeutics. The Company's research and development efforts are
          primarily focused on cardiorenal  disorders.  The Company has research
          and    development    collaborations    with   a   number   of   other
          biopharmaceutical  companies  under  which  it  may  share  costs  and
          revenues.  Scios'  commercial  operations  division  also  markets six
          psychiatric  products in the United  States in  co-operation  with the
          Company's partners. In the course of its development  activities,  the
          Company has  sustained  operating  losses and  expects  such losses to
          continue through at least 1997.

 2.       Summary of Significant Accounting Policies
  
          Principles of Consolidation

          The consolidated  financial  statements  include the accounts of Scios
          Inc.  and its  wholly-owned  and  majority-owned  subsidiaries.  Other
          affiliates,  more than 20% but less than 50% owned,  are accounted for
          on the  equity  basis.  Intercompany  transactions  and  balances  are
          eliminated  on  consolidation.   The  Company  accounts  for  its  10%
          ownership  in Guilford  Pharmaceuticals  Inc.  ("Guilford")  under the
          equity method  because it has  representation  on Guilford's  Board of
          Directors.

          Use of Estimates

          The  preparation of financial  statements in conformity with generally
          accepted  accounting  principals requires management to make estimates
          and  assumptions  that  affect  the  reported  amounts  of assets  and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial  statements and the reported amounts of revenues
          and expenses during the reporting period.  Actual results could differ
          from those estimates.

          Cash Equivalents

          The Company considers all highly liquid investments with maturities of
          less than ninety days, at the time acquired,  to be cash  equivalents.
          Cash equivalents are stated at cost, which approximates market value.

          Marketable Securities

          All marketable securities at December 31, 1996 and 1995 were deemed by
          management to be available-for-sale  and are stated at fair value with
          net  unrealized  gains or losses  reported  in  stockholders'  equity.
          Realized gains and losses on sales of all such securities are reported
          in  earnings  and  computed  using the  specific  identification  cost
          method.

          Business Risk and Credit Concentration

          A majority of the Company's  revenues are derived from product  sales,
          which  consist  entirely of sales in the United States under a license
          agreement with SmithKline Beecham Corporation ("SB") (see Note 3). Any
          factor  adversely  affecting demand for, or supply of, the psychiatric
          products covered by the license  agreement could materially  adversely
          affect the Company's business and financial performance.

                                       F-7
<PAGE>

          The Company's  excess cash is invested in a  diversified  portfolio of
          securities  consisting of United  States  Treasury  Notes,  government
          agency   securities,   deposits   with  major   banks  and   financial
          institutions,  and  in  investment-grade   interest-bearing  corporate
          securities issued by companies in a variety of industries.

          Depreciation and Amortization

          Buildings and equipment are stated at cost and are  depreciated  using
          the straight-line method over the estimated useful lives of the assets
          (3 to 7 years for  equipment  and 40 years for  buildings).  Leasehold
          improvements  are amortized on a straight-line  basis over the shorter
          of the asset life or fixed-lease term.

          Product Sales

          Revenue from sales of certain psychiatric products (the "SB Products")
          under  license  from SB (see Note 3) is  recognized  in the  period in
          which  the  products  are  shipped.  Provision  is made for  estimated
          returns and  allowances,  cash discounts and rebates  attributable  to
          Medicaid programs.

          Co-promotion Commissions

          Revenue from co-promotion commissions (see Note 3) is recognized based
          on estimated sales levels of Ortho-McNeil Pharmaceutical's psychiatric
          product HALDOL(R) Decanoate and Wyeth-Ayerst Laboratories' psychiatric
          product  EFFEXOR(R)  (venlafaxine  HCl) for their respective  contract
          years.

         Contract Revenues

         Research and  development  contract  revenues  from  cost-reimbursement
         agreements  are recorded as the related  expenses are  incurred,  up to
         contractual  limits.  Payments  received  that are  related  to  future
         performance  are  deferred  and recorded as revenues as they are earned
         over specified  future  performance  periods.  Research and development
         payments  for which no services  are  required to be  performed  in the
         future and license  payments  irrevocably  received are  recognized  as
         revenue upon receipt.  Research and development  expenses in 1996, 1995
         and 1994  include  approximately  $1.9  million,  $1.4 million and $2.9
         million, respectively,  incurred in connection with programs subject to
         cost reimbursement, collaborative or other performance agreements.

         Per Share Data

         Loss per share is based on the weighted average number of common shares
         outstanding  for  all  periods,  adjusted  for  treasury  stock.  Stock
         options,  warrants and preferred stock are  antidilutive  and therefore
         excluded from the calculation.

         Treasury Stock

         Treasury   stock  is  stated  at  cost and is  considered  issued  and 
         outstanding.

         Fair Value of Financial Instruments

         Carrying  amounts  of certain of the  Company's  financial  instruments
         including  cash and cash  equivalents,  accounts  receivable,  accounts
         payable and other  accrued  liabilities  approximate  fair value due to
         their short maturities. Based on borrowing rates currently available to
         the Company for loans with similar  terms,  the carrying value of notes
         payable  and  capital  lease   obligations   approximates  fair  value.
         Estimated fair values for short-term investments,  which are separately
         disclosed elsewhere,  are based on quoted market prices for the same or
         similar instruments.

                                       F-8
<PAGE>

 3.     Joint Business Arrangements

        a.  Agreement with SmithKline Beecham Corporation

        Under the terms of an agreement  with SB, the Company has the  exclusive
        rights to market certain SB Products in the United  States.  SB is fully
        responsible for ancillary  matters  relating to sales of the SB Products
        (including  various  administrative  tasks), for the maintenance in good
        standing of all New Drug  Applications  with  respect to the SB Products
        and for the  maintenance of certain  product  liability  insurance.  The
        Company pays SB 40% of net profits,  as defined in the  agreement,  from
        sales of the SB Products.

        b.  Agreement with Ortho-McNeil Pharmaceutical

        In July 1993,  the  Company  entered  into a  five-year  agreement  with
        Ortho-McNeil Pharmaceutical ("Ortho-McNeil"),  an affiliate of Johnson &
        Johnson,  to jointly  promote  the  injectable  antipsychotic  HALDOL(R)
        Decanoate  in the  United  States.  Under  the  agreement,  the  Company
        receives  payments  based on  achieving  specified  sales  levels over a
        contract  year  beginning  in August  and  ending in July.  Ortho-McNeil
        manufactures and distributes the product.  The agreement may be extended
        up to an additional three years upon the attainment of revenue goals.

        c.  Agreements with Wyeth-Ayerst Laboratories

        In April 1996,  the Company  entered  into a  four-year  agreement  with
        Wyeth-Ayerst  Laboratories  ("Wyeth-Ayerst"),  an  affiliate of American
        Home  Products  Corporation,  to promote the  antidepressant  EFFEXOR(R)
        (venlafaxine HCl) to selected  psychiatrists in the United States. Under
        the  agreement,   the  Company  receives  payments  based  on  achieving
        specified  increases  in sales  to the  selected  psychiatrists  over an
        adjusted  base  level  during  each  contract  year  beginning  in June.
        Wyeth-Ayerst manufactures and distributes the product. The agreement may
        be  terminated  by either party  during the  contract  period if certain
        sales targets are not met.

        In October 1996, the Company entered into a collaboration agreement with
        Wyeth-Ayerst  for  the  joint  development  and   commercialization   of
        FIBLAST(R)  trafermin  ("FIBLAST") for the treatment of neurological and
        cardiovascular  disorders. The two companies will co-promote FIBLAST for
        these  indications  in North  America  and share  development  costs and
        profits.  Wyeth-Ayerst received exclusive marketing rights outside North
        America and certain  Pacific  Rim  countries  in return for a royalty on
        sales and  payments  for bulk drug supply  worldwide.  Wyeth-Ayerst  has
        provided a $12.0 million line of credit that the Company may use to fund
        expansion of its manufacturing facility for FIBLAST (see Note 9).

        d.  Agreement with Genentech, Inc.

        In December 1994,  the Company  entered into a  collaboration  agreement
        with   Genentech,   Inc.   ("Genentech")   for   the   development   and
        commercialization  of  AURICULIN(R)  anaritide   ("AURICULIN")  for  the
        treatment of acute renal  failure.  The two  companies  will  co-promote
        AURICULIN for this indication in the United States and Canada, and share
        equally  in  profits  from  its  commercialization.  Genentech  received
        exclusive  marketing  rights to other  markets  outside North America in
        return  for a  royalty  on  sales.  Concurrent  with  the  collaboration
        agreement,  Genentech  purchased $20.0 million of Scios preferred stock,
        convertible  into  approximately  2.1 million shares of common stock and
        provided a $30.0  million loan to the Company in the form of a letter of
        credit (see Note 9). The Company can borrow against the loan through the
        year 2002. Genentech has also agreed to pay Scios up to $50.0 million in
        milestone  payments upon the achievement of key  development  events and
        certain commercial  targets. At December 31, 1996, no milestone payments
        had been made and  Genentech  had  converted  8,421  shares of preferred
        stock into 842,100 shares of common stock.

                                       F-9
<PAGE>

        e.  Agreements with Kaken Pharmaceutical Co., Ltd.

        In September  1994, the Company entered into a series of agreements with
        Kaken  Pharmaceutical Co., Ltd. ("Kaken") to expand a previous agreement
        signed in 1988 for FIBLAST. Under the 1994 agreements,  the Company will
        collaborate  with Kaken to further  develop  the  FIBLAST  manufacturing
        process,  provide Kaken a license to the Company's FIBLAST manufacturing
        technology  and supply  FIBLAST  product.  In return,  the Company  will
        receive  milestone  payments which are contingent on Kaken's  continuing
        development of the product. On December 31, 1996, the Company's deferred
        revenue of $3.7  million  consisted  of payments  received to date under
        these agreements.

4.      Affiliate

        In June 1994,  Guilford,  then a  fully-consolidated  subsidiary  of the
        Company,  completed  an initial  public  offering  which  decreased  the
        Company's  ownership from 62% to 29%. As a result,  the equity method of
        accounting  was adopted by the Company.  Prior to the date of the public
        offering, the financial results of Guilford were fully consolidated with
        those of the Company. Due to subsequent public stock offerings,  and the
        sale by the  Company of 200,000  shares of Guilford  stock in 1996,  the
        Company's ownership in Guilford has been reduced to 10%. The Company has
        continued to use the equity method of accounting  for its  investment in
        Guilford because it has representation on Guilford's Board of Directors.

 5.     Marketable Securities

        Unrealized  gains and losses on  marketable  securities  at December 31,
        1996 by classification were as follows:
<TABLE>
<CAPTION>
                                                            Unrealized      Unrealized
        (in thousands)                      Cost Basis      Gains           Losses           Fair Value
        --------------                      ----------      -----           ------           ----------
        <S>                                 <C>             <C>              <C>             <C>    

       Debt securities:
          U.S. Government &
          Government Agency
          Securities                       $45,679           $ 47            $(224)          $45,502

          Corporate Bonds                   14,974             32              (49)           14,957

       Equity Investments                       --            124               --               124
                                               ---            ---              ---               ---

           Total                           $60,653           $203            $(273)          $60,583
                                           =======           ====            =====           =======
</TABLE>

                                      F-10
<PAGE>


        Unrealized  gains and losses on  marketable  securities  at December 31,
        1995 by classification were as follows:
<TABLE>
<CAPTION>
                                                            Unrealized      Unrealized
        (in thousands)                      Cost Basis      Gains           Losses           Fair Value
        --------------                      ----------      -----           ------           ----------
        <S>                                 <C>             <C>             <C>              <C>    

       Debt securities:
          U.S. Government &
          Government Agency
          Securities                        $61,507          $425           $(56)            $61,876

          Corporate Bonds                    22,137           235            (26)             22,346
                                             ------           ---            ---              ------

             Total                          $83,644          $660           $(82)            $84,222
                                            =======          ====           ====             =======
</TABLE>

        At December 31, 1996, scheduled maturities for marketable securities was
        less than one year for  $6,888,000  and  between  one and five years for
        $53,571,000.

        The Company  realized  gains of  $279,000  and losses of $379,000 on the
        disposal of marketable  securities during 1996 and gains of $998,000 and
        losses  of  $929,000  on  the  disposal  and  write-down  of  marketable
        securities during 1995.

 6.     Property and Equipment
<TABLE>
<CAPTION>
                                                                                    December 31,
          (in thousands)                                                      1996              1995
                                                                              ----              ----
          <S>                                                                 <C>               <C>    

          Laboratory equipment                                                $10,408           $ 9,026
          Computer and related equipment                                        3,136             3,239
          Furniture and other                                                   2,239             1,623
          Buildings and building improvements                                  47,253            43,483
                                                                               ------            ------
                                                                               63,036            57,371
                                                                               ======            ======
          Accumulated depreciation and
              amortization                                                    (29,424)          (24,709)
                                                                              -------           ------- 
                                                                               33,612            32,662
          Construction in progress                                              3,227             2,869
                                                                                -----             -----
                                                                              $36,839           $35,531
                                                                              =======           =======
</TABLE>


 7.      Other Assets
<TABLE>
<CAPTION>
                                                                                    December 31,
          (in thousands)                                                      1996              1995
                                                                              ----              ----
          <S>                                                                 <C>               <C>    

          Deposits                                                            $  193            $ 318
          Other assets                                                           216              402
          Equity investments                                                   1,000               --
          Employee notes receivable                                            1,010            1,410
                                                                               -----            -----
                                                                              $2,419           $2,130
                                                                               ======           ======
 </TABLE>

                                      F-11
<PAGE>

 8.       Other Accrued Liabilities
<TABLE>
<CAPTION>
                                                                                    December 31,
          (in thousands)                                                       1996              1995
                                                                               ----              ----
          <S>                                                                  <C>               <C> 
          Accrued Medicaid rebates                                            $ 1,393           $ 1,864
          Accrued payroll                                                       3,502             1,708
          Profit distribution to third parties                                  1,210             1,639
          Accrued clinical trial expenses                                         832               752
          Accrued royalties payable                                             1,790               213
          Other                                                                 1,284             1,687
                                                                                -----             -----
                                                                              $10,011            $7,863
                                                                              =======            ======
</TABLE>

        In  September  1994,  the  Company  recorded  a charge  of $3.5  million
        associated with the closure of its research and development  facility in
        Baltimore, Maryland and the transfer of certain research and development
        operations  to  the  Company's  California  facilities.   Of  the  total
        restructuring  charge,  severance and related  costs  accounted for 49%,
        asset write-downs 27%, facility carrying costs 13% and chemical disposal
        and other expenses 11%.

        As of December 31, 1995, actual cash  expenditures  incurred as a result
        of the restructuring plan were approximately $2.6 million. No additional
        charges were recorded.  In 1995, the Company terminated its lease on the
        Baltimore research and development  facility by exercising its option to
        purchase the building for approximately $3 million.


 9.     Lease and Debt Commitments

        a. Operating Leases

        The Company leases facilities in California and Maryland and the land on
        which the Company's  Mountain  View,  California  facilities are located
        under  operating  leases.  The  long-term  ground lease expires in 2053.
        Beginning in July 2010,  a portion of the annual  ground rent is subject
        to  renegotiation.  In addition,  the Company has entered into operating
        leases covering certain laboratory and computer equipment.

        Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>

                                                                    Land and
                                                                    Facilities        Equipment
                                                                    Operating         Operating
             (in thousands)                                         Leases            Leases
             --------------                                         ------            ------
             <S>                                                    <C>               <C>         

             1997                                                    $  875           $  639
             1998                                                       908              538
             1999                                                       944              327
             2000                                                       980               --
             2001                                                     1,016               --
             Thereafter                                               2,123               --
                                                                      -----            -----    
                                                                     $6,846           $1,504
                                                                     ======           ======
</TABLE>

             Rent expense for all facilities  operating leases was approximately
             $1,177,000,   $456,000  and  $565,000  in  1996,   1995  and  1994,
             respectively.

                                       F-12
<PAGE>


          b. Capital Leases and Borrowing Arrangements

             At December 31, 1996,  long-term debt and capital lease commitments
             were:
<TABLE>
<CAPTION>
                                                                                                Capital
             (in thousands)                                              Debt                    Leases
             --------------                                              ----                    ------
             <S>                                                       <C>                      <C>    
             1997                                                      $  781                       $17
             1998                                                         359                        --
             ----                                                         ---                       ---  
                                                                        1,140                        17
             Less future interest                                         (84)                       (1)
                                                                          ---                        -- 
                                                                       $1,056                       $16
                                                                       ======                       ===
</TABLE>

          Long-term debt consists of two five-year notes,  secured by equipment,
          at  interest  rates of 9.9% and 9.8%,  due in April  1998 and  October
          1998,  respectively.  Under the terms of the  notes,  the  Company  is
          required to maintain certain covenants concerning minimal tangible net
          worth, current ratio,  liabilities to net worth ratio and minimum cash
          and marketable securities balances.

          In December 1996, the Company secured a $3.0 million bank loan payable
          in June 1997 at a floating  interest rate based on the six-month LIBOR
          rate plus 0.75% (6.38% at December 31,  1996).  The loan is secured by
          $3.3 million of Government securities.

        c.Genentech Loan Commitment

          As part of the  AURICULIN  agreement  with  Genentech,  Genentech  has
          committed to loan the Company up to $30.0  million.  The commitment is
          presently  secured by a letter of  credit.  The loan can be drawn down
          through the year 2002,  and bears interest at the prime rate. The loan
          is repayable in cash or Scios common stock,  at the prevailing  market
          price, at the Company's  option at any time through December 31, 2002.
          No amounts were outstanding under the agreement at December 31, 1996.

        d.Wyeth-Ayerst Loan Commitment

          As part of the FIBLAST  agreement,  Wyeth-Ayerst has committed to loan
          the  Company up to $12  million  to fund  expansion  of the  Company's
          manufacturing facility for FIBLAST. The loan can be drawn down through
          the year 2004,  and will bear interest at the one-year LIBOR rate plus
          0.225%  (6.005% at December 31,  1996).  No amounts  were  outstanding
          under the agreement at December 31, 1996.

10.     Litigation

        In September,  1996,  the United States  District Court for the Northern
        District of California  dismissed with prejudice a lawsuit that had been
        filed by certain  stockholders  in May,  1995  against  the  Company and
        Richard L. Casey, its chairman and chief executive officer, on behalf of
        the  individual  plaintiffs  and on  behalf of other  purchasers  of the
        Company's  stock  during the period from October 6, 1993 to May 2, 1995.
        The action alleged violations of federal securities laws,  claiming that
        the  defendants  issued a series  of false  and  misleading  statements,
        including filings with the Securities and Exchange Commission, regarding
        the Company and clinical trials involving AURICULIN. The plaintiffs have
        filed notice that they will appeal the District  Court's ruling in favor
        of the Company.

                                       F-13
<PAGE>

        On November  29,  1995,  the Company was  notified by the United  States
        Environmental  Protection Agency ("EPA") that it may have a liability in
        connection  with the  clean-up of a toxic waste site  arising out of the
        alleged  disposal of hazardous  substances  by a  subcontractor  of Nova
        Pharmaceutical  Corporation,  which the Company  acquired  in 1992.  The
        Company is one of many  potentially  responsible  parties that have been
        identified as associated  with this specific site. The Company is in the
        process of responding to the EPA's request for additional information on
        materials  disposed of at this site. The ultimate outcome of this action
        cannot  presently  be  determined.  Accordingly,  no  provision  for any
        liability  or loss  that may  result  from  adjudication  or  settlement
        thereof  has  been  made  in  the  accompanying  consolidated  financial
        statements.

11.     Research Commitments

        The  Company's   commitments  for  research   sponsorship   payments  to
        collaborators  and  institutions  during 1997,  1998 and 1999  aggregate
        approximately $86,000.

        In 1988, the Company  purchased the interests of Biotechnology  Research
        Partners,  a  limited  partnership  in a joint  venture  and made a down
        payment of $575,000.  The balance of the purchase price is to be paid in
        quarterly  installments  in accordance with the following  formula:  (i)
        until the minority  partners  have  received  payments of  approximately
        $22.8  million,  the Company will pay  approximately  37% of the royalty
        income from third-party licenses and approximately 3.7% of the Company's
        gross sales of Partnership products; (ii) thereafter, until the minority
        partners  have  received  aggregate  payments  of  approximately   $34.1
        million,  the Company will pay  approximately  31% of the royalty income
        and  approximately  3.1% of the  Company's  gross  sales of  Partnership
        products;  and (iii) thereafter,  until the earlier of 20 years from the
        date of exercise  of the option or the time all patents  relating to the
        Partnership's  technology  expire and all  information  relating to that
        technology  becomes part of the public  domain,  the Company will pay to
        the  minority  partners  approximately  20.5% of the royalty  income and
        approximately  2% of the Company's gross sales of Partnership  products.
        As of December  31,  1996,  $1.1 million was accrued for payments to the
        minority  partners  in 1997.  Partnership  products  for which  minority
        partners will receive payments include AURICULIN and FIBLAST.

        In  December  1992,  the  Company  exercised  its option to acquire  all
        interests in Nova Technology Limited Partnership for $20.4 million.  The
        Company also issued contingent payment rights to all limited partners of
        the  partnership,  pursuant  to which the  Company  is  obligated  until
        January  15,  2008 to pay  royalties  on the sale or  license of certain
        products that were under development by the partnership.  As of December
        31,  1996,  $0.6  million was accrued for payment in 1997 as a result of
        royalties   associated   with   the    commercialization   of   Guilford
        Pharmaceuticals' GLIADEL(R) wafer.

12.    Stockholders' Equity

       At December 31, 1996, warrants were outstanding to purchase approximately
       789,000 shares of the Company's common stock at $26.74 per share and are 
       exercisable through June 1998.

        a. Convertible Preferred Stock

        The Company's  convertible  preferred stock may be issued in series that
        have such rights as may be  designated  by the Board of  Directors  from
        time to time.  There were 12,632  shares of  preferred  stock issued and
        outstanding at December 31, 1996.  These  non-voting  shares,  which are
        convertible at the option of the holder into 1,263,200  shares of common
        stock,  were  issued  to  Genentech  in  connection  with the  AURICULIN
        collaboration  agreement.  Each share of preferred  stock is entitled to
        receive non-cumulative dividends in preference to any dividends declared
        and paid on common stock.  No dividends have been declared or paid as of
        December 31, 1996. In the event of  liquidation  or  dissolution  of the
        Company,  each  share  of  preferred  stock is  entitled  to  receive  a
        distribution  amount in  preference  to common  stock of $950 per share,
        plus declared but unpaid dividends.

                                       F-14
<PAGE>

        b. Common Stock

        The  Company  has a  Common  Share  Purchase  Rights  Plan  under  which
        stockholders  have a right to purchase for each share held, one share of
        the   Company's   common  stock  at  a  50%  discount  and,  in  certain
        circumstances,  a share of  common  stock of an  acquirer  at a  similar
        discount.  The rights become  exercisable,  at $55.00 per right,  in the
        event of an acquisition or tender offer which results in the acquisition
        of  20% or  more  of the  Company's  common  stock.  The  rights  may be
        redeemed,  in  certain  circumstances,  at $0.01 per right and expire on
        July 31, 2000.

13.     Employee Benefits and Stock Option Plans

        The Company has a qualified profit sharing plan and trust under Internal
        Revenue Service Code sections 401(a) and 401(k).  Employees are eligible
        to participate in the plan the first day of the month after hire and can
        elect to contribute  to the plan up to 15% of salary  subject to current
        statutory limits. In 1996, the Company matched employee contributions at
        a rate of 100% to a maximum of $3,000 per employee, except as restricted
        by statutory limits. The Company  contribution is 100% vested at the end
        of an employee's third year of employment.  Company contributions to the
        plan  totaled  approximately  $649,000  in  1996,  $633,000  in 1995 and
        $794,000 in 1994.

        Under the Company's  stock option plans,  the Board of Directors has the
        authority to  determine  to whom options will be granted,  the number of
        shares,  the vesting period and the exercise price (which cannot be less
        than fair market value at date of grant for  incentive  stock options or
        85% of fair market value ("FMV") for nonstatutory  options). The options
        are  exercisable at times and in increments as specified by the Board of
        Directors,  generally expire ten years from date of grant and fully vest
        over  periods  from  three  to five  years.  The  following  shares  are
        authorized and available for grant as of December 31, 1996:

<TABLE>
<CAPTION>
                                            Shares
   Plan         Shares       Options        Available
   Title        Authorized   Outstanding    for Grant          Option Price
   -----        ----------   -----------    ---------          ------------
   <S>          <C>          <C>            <C>                <C>    

   1983/86      2,200,000     1,074,043            --          Not less than 85% of FMV
   1989           170,000        33,000            --          FMV
   1992         3,500,000     2,650,189       279,834          Not less than 85% of FMV
   1996           100,000        19,091        80,909          Not less than 85% of FMV
   NQ             443,161            --            --          Not less than 85% of FMV

</TABLE>

   As of  December  31,  1996 the Company had not issued any options at less
   than FMV.




                                      F-15
<PAGE>





       Additional  information  with  respect  to the  activity  of  outstanding
       options is summarized in the following table:
<TABLE>
<CAPTION>

                                                                  Number of                           Aggregate
             Common Stock                                         Shares       Option Price           Price
             ------------                                         ------       ------------           -----
                                                                                                      (in thousands)
             <S>                                                  <C>          <C>                    <C>    

             Balances at December 31, 1993                        3,920,431    $0.16-$21.13           $29,720

               Granted                                              303,149    $6.63-$ 9.00             2,597
               Exercised                                            (71,702)   $2.56-$ 9.13              (375)
               Canceled                                            (457,043)   $2.56-$18.46            (3,683)

             Balances at December 31, 1994                        3,694,835    $0.16-$21.13           $28,259

               Granted                                              780,580    $3.50-$ 7.50             5,512
               Exercised                                           (123,171)   $0.16-$ 7.13              (512)
               Canceled                                            (520,701)   $2.56-$21.13            (4,237)

             Balances at December 31, 1995                        3,831,543    $2.56-$21.13           $29,022

               Granted                                              627,000    $4.56-$ 6.88             3,579
               Exercised                                           (155,142)   $2.56-$ 7.13              (594)
               Canceled                                            (527,078)   $3.50-$21.13            (3,797)

             Balances at December 31, 1996                        3,776,323    $3.50-$21.13           $28,210

</TABLE>

        At December 31, 1996,  options to purchase  2,363,314  shares were fully
        vested.

        The Company has adopted the  disclosure-only  provisions of Statement of
        Financial  Accounting  Standards No. 123,  "Accounting  for  Stock-Based
        Compensation"  ("SFAS  No.  123").  Accordingly,  no  compensation  cost
        related to options has been  recognized in 1996. Had  compensation  cost
        for stock  options  in 1995 and 1996 been  determined  based on the fair
        value at the grant date for awards in those  years  consistent  with the
        provisions  of SFAS No. 123,  the  Company's  net loss per share for the
        respective years would have been:
<TABLE>
<CAPTION>
                                                                                      December 31,
          (in thousands, except per share amounts)                              1996              1995
          ----------------------------------------                              ----              ----
          <S>                                                                   <C>               <C>    

         Net loss - as reported                                                ($18,403)          ($26,382)

         Net loss - pro forma                                                  ($19,029)          ($26,617)

         Net loss per share - as reported                                        ($0.51)            ($0.74)

         Net loss per share - pro forma                                          ($0.53)            ($0.74)

</TABLE>

       The fair value of each  option  grant is  estimated  on the date of grant
       using the  Black-Scholes  single option pricing method  assuming:  a risk
       free rate of 6.41%,  an expected  option  life of 5 years,  no payment of
       dividends  and a  volatility  factor of 0.8134.  The  risk-free  rate was
       calculated  in  accordance  with the grant date and the  expected  option
       life. The volatility factor and expected option life was calculated using
       1995 and 1996 historical data.




                                       F-16
<PAGE>





        The options  outstanding  by exercise  price at December 31, 1996 are as
        follows:
<TABLE>
<CAPTION>
                                                               Weighted
                                         Number of             Average                     Weighted
                                         Options               Remaining                   Average
        Exercise Price                   Outstanding           Contractual Life            Exercise Price
        --------------                   -----------           ----------------            --------------
        <S>                              <C>                   <C>                         <C>    

        $3.50-$ 6.13                       789,066             7.83                        $  5.47
        $6.50-$ 7.00                       674,932             3.36                        $  6.81
        $7.13-$ 7.13                       919,190             5.75                        $  7.13
        $7.21-$ 9.00                       837,696             7.53                        $  7.82
        $9.13-$21.13                       555,439             4.91                        $ 11.15
        ----- ------                       -------             ----                         ------
        $3.50-$21.13                     3,776,323             6.03                        $  7.47
        ===== ======                     =========             ====                        =======

</TABLE>

        The options currently exercisable by exercise price at December 31, 1996
        are as follows:
<TABLE>
<CAPTION>

                                         Number of              Weighted
                                         Options                Average
       Exercise Price                    Exercisable            Exercise Price
       --------------                    -----------            --------------
       <S>                             <C>                      <C>   

       $3.50-$ 6.13                      297,180                $  5.67
       $6.50-$ 7.00                      530,103                $  6.82
       $7.13-$ 7.13                      752,723                $  7.13
       $7.21-$ 9.00                      243,598                $  8.12
       $9.13-$21.13                      539,710                $ 11.16
       ----- ------                      -------                 ------
       $3.50-$21.13                    2,363,314                $  7.90
       ===== ======                    =========                =======

</TABLE>

14.     Significant Customers

        In 1996,  Wyeth-Ayerst  contributed 21% of total  revenues.  In 1995 and
        1994, no  individual  customer or partner  contributed  more than 10% of
        total revenues.

        At December 31, 1996, the $4.8 million in accounts  receivable  included
        the following receivables  associated with Commercial  Operations:  $1.2
        million  from  Ortho-McNeil,  $0.8 million  from  Wyeth-Ayerst  and $0.7
        million from SB. Also included was a $1.0 million  receivable related to
        an equipment lease agreement.

15.     Income Taxes

        The Company's  deferred tax assets and liabilities are determined  based
        on the  difference  between  the  financial  statement  and tax bases of
        assets and liabilities using enacted tax rates in effect for the year in
        which the differences  are expected to affect taxable income.  Valuation
        allowances are established  when necessary to reduce deferred tax assets
        to the amounts expected to be realized.

        The Company has federal and state income tax net operating  loss ("NOL")
        and research credit  carryforwards at December 31, 1996 for tax purposes
        available as follows:

        Federal NOL                                             $249,000,000
        State NOL                                                 37,000,000
        Federal Research Credit                                    9,500,000
        State Research Credit                                      2,600,000

                                       F-17
<PAGE>

        These  federal  and state  NOL  carryforwards  expire in the years  1998
        through 2011, and 1997 through 2000 respectively.  The federal and state
        research credit carryforwards expire in the years 1998 through 2010, and
        2002 through 2010, respectively.

        Due to a change in the ownership of the Company,  as defined,  a portion
        of  the  federal  and  state  NOL  carryover  is  subject  to an  annual
        utilization limitation. Should another change in ownership occur, future
        utilization  of  the  Company's  NOL  carryforwards  may be  subject  to
        additional limitations.

        The tax effects of temporary  differences  that give rise to significant
        portions of the deferred tax assets are presented below:

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                                            -----------------------
        (in thousands)                                                 1996                                1995
        --------------                                                 ----                                ----
        <S>                                                        <C>                                 <C>   

        Depreciable and amortizable
          assets, primarily technology                            $   8,500                            $  6,800
        Other accrued liabilities                                     3,400                               3,200
        State (net of federal benefit)                                7,000                               5,000
        Net operating loss carryforward                              84,600                              76,600
        Research credit                                               9,500                               8,500
        Valuation allowance                                        (113,000)                           (100,100)
                                                                   --------                            -------- 

        Net deferred tax asset                                    $      --                            $     --
   
                                                                   ========                            ========
</TABLE>

        Due to the uncertainty  surrounding the realization of the favorable tax
        attributes  in future tax  returns,  the  Company has placed a valuation
        allowance against its otherwise recognizable net deferred tax assets.


                                       F-18